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AMERICAN    CITIZEN    SERIES 

EDITED    BY 

ALBERT   BUSHNELL    HART,  LL.D. 


FINANCIAL    HISTORY 


OF 


THE    UNITED    STATES 

DAVIS   RICH    DEWEY,  Ph.D. 


American  Citizen  getvitti 

Financial   History 

of 

The   United  States 


BY 


DAVIS    RICH    DEWEY,    Ph.D., 

PROFESSOR    OF    ECONOMICS    AND    STATISTICS, 
MASSACHUSETTS    INSTITUTE   OF   TECHNOLOGY. 


LONGMANS,   GREEN,   AND   CO., 

91   and  93  Fifth  Avenue,   New  York 

LONDON,  BOMBAY,  AND  CALCUTTA 

I9O9 


Copyright,  1902. 
By  Longmans,  Green,  and  Co. 


All  rights  reserved. 

First  edition,  February,  1903. 

Second  edition,  revised,  November,  1903. 

Third  edition,  revised,  July,  1907. 

Reprinted,  August,  1909. 


Knibersttg  ^wss: 
John  Wilson  and  Son,  Cambridge,  U.  S.  A. 


StacK 
Annex 

2>5lf 


TO    THE   SEMINARY 

OF    THE 

DEPARTMENT   OF    HISTORY,  POLITICS,  AND   ECONOMICS 
OF   JOHNS    HOPKINS    UNIVERSITY, 

Of  which  the  author  was  a  member  from  1883  to  1886.  Under  the 
guidance  of  Adams,  Ely,  and  fameson,  we  read  and  learned. 
The  first  has  gone,  leaving  affectionate  memories  and  organized 
activities  of  permanent  usefulness  ;  the  others  are  still  doing 
their  work  in  a  spirit  of  broad-minded  sympathy  and  fine 
scholarship. 


Preface. 


The  attempt  to  compress  into  a  volume  of  moderate 
size  an  account  of  Federal  finance  from  the  Colonial 
period  down  to  the  present  time  occasions  perplexity. 
Some  knowledge  of  politics  and  economics  must  be 
pre-supposed,  but  the  exact  measure  it  is  difficult  to 
estimate.  In  order  to  place  readers  as  far  as  possible 
on  a  common  basis,  the  reference  lists  which  are  scat- 
tered through  the  volume  have  been  constructed  on  a 
generous  plan.  In  no  way,  however,  are  these  lists  to 
be  regarded  as  conditional  to  an  understanding  of  the 
text ;  they  are  simply  opportunities  for  a  better  prepar- 
ation, or  a  further  study  of  special  topics. 

In  writing  this  work,  I  have  kept  two  things  constantly 
in  mind  :  first,  its  proportions,  or  the  general  perspec- 
tive; and  second,  the  relations  of  financial  legislation  to 
democracy.  It  is  easy  in  the  light  of  accumulated  ex- 
perience to  pass  judgment  on  the  errors  of  the  past,  but 
historical  study,  in  my  opinion,  is  more  fruitful  if  the 
reader  endeavors  to  interpret  the  past  in  accordance 
with  the  experience  which  was  available  at  the  time  the 
occurrences  took  place.  Past  environment  is  the  true 
test  of  past  action.  With  this  conviction,  I  have 
endeavored  to  refrain,  possibly  not  with  entire  consist- 
ency, from  emphasizing  the  mistakes  of  previous  gen- 
erations.    A  work  on  "  American  Finance  "  might  well 


viii  Preface. 

have  a  didactic  purpose,  but  this  is  a  history  and  not 
a  treatise. 

In  determining  the  proportions  of  this  volume,  I  have 
been  obliged  to  pass  by  many  incidents  of  keen  interest ; 
the  omissions  are  necessarily  far  greater  than  the  inclu- 
sions. The  result  is  doubtless  a  loss  of  interest,  but  it 
is  hoped  that  the  gain  from  an  orderly  presentation  of 
the  essential  facts  may  be  a  substantial  compensation. 

It  is  impossible  to  include  by  name  all  of  those  who 
have  given  friendly  counsel,  but  I  wish  to  thank  in 
particular  the  editor  of  this  series,  Professor  Hart,  and 
Professor  Henry  B.  Gardner,  of  Brown  University.  The 
former  undertook  a  very  considerate  reading  of  the 
manuscript,  and  without  the  support  of  his  knowledge  of 
American  history  my  task  would  have  been  much  more 
difficult.  To  Professor  Gardner  I  am  under  great  in- 
debtedness ;  his  learning  and  sound  judgment  have 
constantly  stood  me  in  good  stead,  and  strengthened 
a  friendship  of  long  standing.  I  also  wish  to  make 
acknowledgment  to  Professor  Bullock,  who  has  done 
pioneer  work  for  several  periods  of  American  finance; 
his  investigations  justify  the  hope  that  he  will  find 
opportunity  to  write  a  larger  work  on  the  finances  of 
our  country.  I  am  in  a  special  way  indebted  to  my 
colleague,  Professor  Currier,  to  Mr.  S.  N.  D.  North,  and 
to  various  officials  of  the  Treasury  Department. 

Massachusetts  Institute  of  Technology, 
Boston,  January,  1903. 


SUGGESTIONS    FOR    STUDENTS,    TEACHERS, 
AND    READERS. 

I.   Introductory  Reading  :  Political  History  and  Biography. 

It  is  hardly  necessary  to  say  that  the  student  of  American  finance 
should  be  acquainted  with  the  main  outlines  of  the  political  history 
of  the  United  States,  and  also  have  some  general  knowledge  of 
that  part  of  applied  economics  which  deals  with  taxation  and  mon- 
etary questions.  It  is  believed  that  a  knowledge  of  American  his- 
tory as  represented  in  the  series,  "  Epochs  of  American  History," 
will  enable  the  reader  to  apply  an  intelligent  judgment  to  the 
following  narrative  of  fiscal  events,  but  as  a  further  help  precise 
page  references  have  been  given  in  the  several  chapters  to  general 
historical  works  which  show  the  relation  of  politics  to  financial 
affairs.  With  this  end  in  view,  as  an  introduction  to  more  special 
reading,  the  following  list  of  histories  and  biographies  is  also 
suggested.  Of  the  larger  histories,  that  by  Schouler  is  probably 
the  most  helpful  single  work,  as  it  extends  over  a  long  period, 
1783-1861,  and  gives  prominence  to  tariff  and  banking  questions. 
Of  the  biographies,  those  of  Lodge  on  Hamilton,  Stevens  on  Gal- 
latin, Schurz  on  Clay,  Sumner  on  Jackson,  Hart  on  Chase,  and 
Burton  on  Sherman,  are  to  be  recommended.  These  and  other 
works  are  noted  below ;  the  descriptive  notes  will  enable  the 
student  to  select  the  volumes  in  which  he  may  be  especially 
interested. 

Adams,  Henry.  History  of  the  United  States  of  America  (dur- 
ing the  administrations  of  Jefferson  and  Madison).  (N.  Y., 
1889-1891.  9  vols.)  —  An  authoritative  history  for  the  period 
covered.  The  index  in  Vol.  IX  is  very  full ;  see  Bank  of  U.  S. ; 
Banks,  State  ;  Dallas,  A.  J. ;  Finances;  Gallatin  ;  Loans  ;  Man- 
ufactures; Specie;  Specie  payments;  Taxes;  Treasury  notes. 
Adams,  HENRY.      The  Life  of  Albert   Gallatin.     (Philadelphia, 

1880.)  —  Of  the  greatest  value  for  1801-1813,  pp.  267-492. 
Blaine,  James  Gillespie.  Twenty  Years  of  Congress,  from 
Lincoln  to  Garfield.  (Norwich,  Conn.,  1884.  2  vols.)  —  Valua- 
ble as  a  record  of  political  events.  Extracts  from  many  debates ; 
Vol.  I,  chapters  18,  19,  22  treat  of  the  finances  of  Civil  War 
period;  Vol.  II,  chapters  13  and  24  of  post-bellum  financial 
legislation. 


x  Suggestions  for  Students,   Etc. 

Boutwell,  George  Sew  all.  Reminiscences  of  Sixty  Years  in 
Public  Affairs.  (N.  Y.,  1902.  2  vols.)  —  Is  interesting  for  side- 
lights on  the  establishment  of  the  internal  revenue  system  and 
on  bond  issues  after  the  Civil  War. 

Burton,  Theodore  E.  John  Sherman.  (Boston,  1906.)  — 
More  a  financial  narrative  than  a  biography. 

Dallas,  George  Mifflin.  Life  and  Writings  of  A.  J.  Dallas. 
(Philadelphia,  1871.) 

Gordy,  John  Pancoast.  A  History  of  Political  Parties  in  the 
United  States.  (N.  Y.,  1900-1904.  2  vols.)  —  Concise  and  val- 
uable for  Constitution,  and  Hamilton's  policy;  see  Vol.  I, 
chapters  2-9,  13;  Vol.  II,  chapters  20,  25,  28. 

Hart,  Albert  Bushnell.  Salmon  Portland  Chase.  (Boston, 
etc.,  1899.)  —  The  best  critical  biography  of  Chase ;  see  chapters 
9  and  11  on  finances  of  the  Civil  War,  and  chapter  15  on  the 
Supreme  Court  decisions. 

Holst,  Hermann  Eduard  von.  The  Constitutional  and  Politi- 
cal History  of  the  United  States.  Translated  by  John  J.  Lalor 
and  others.  (Chicago,  187 7- 1892.  7  vols,  and  an  index  vol.)  — 
Devoted  primarily  to  political  aspects  of  slavery;  consult,  however, 
in  index,  Vol.  IX,  Bank  ;  Banks  ;  Commercial  Crisis,  1837  :  ditto, 
1857:  Nullification;  Public  Lands ;  Sub-Treasury;  Tariff. 

Lodge,  Henry  Cabot.  Alexander  Hamilton.  (Boston,  etc. 
nth  ed.,  1895.)  —  An  appreciative  study  by  a  political  admirer. 

McCulloch,  Hugh.  Men  and  Measures  of  Half  a  Century. 
(N.  Y.,  1889.)  —  Though  discursive  and  anecdotal,  it  throws 
much  light  on  banking  in  the  West  before  the  Civil  War,  and  on 
financial  operations  of  the  treasury  at  its  close. 

McMaster,  John  Bach.  History  of  the  People  of  the  United 
States  from  the  Revolution  to  the  Civil  War.  (N.  Y.,  1883- 
1906.  6  vols,  published.)  —  The  volumes  published,  covering 
the  period  1 783-1 842,  contain  serviceable  indexes  and  descrip- 
tive tables  of  contents ;  currency  and  tariff  controversies  are 
described. 

Morse,  John  Torrey,  Jr.  Life  of  Alexander  Hamilton.  (Bos- 
ton, 1876.  2  vols.)  —  A  fuller  biography  than  that  of  Lodge; 
sympathetic  yet  critical. 

Rhodes,  James  Ford.  History  of  the  United  States  from  the 
Compromise  of  1850.  (N.  Y.,  1892-1906.  7  vols.)  —  Covers 
the  period,  1850-1877. 


Suggestions  for  Students,   Etc.  xi 

Shepard,  Edward  M.  Martin  Van  Buren.  (Boston,  etc., 
1888.) — Contains  an  excellent  study  of  economic  conditions, 
1830-1840. 

Sherman,  John.  Recollections  of  Forty  Years,  a  Biography. 
(The  Werner  Company,  Chicago,  N.  Y.,  etc.,  1895.)  —  As  an 
account  of  the  author's  active  participation  in  public  finance,  the 
memoirs  are  of  great  interest. 

Schouler,  James.  History  of  the  United  States  of  America 
under  the  Constitution.  (Rev.  ed.,  N.  Y.,  1895-1899.  6  vols.) 
—  Covers  the  period  1 783—1861  ;  a  most  serviceable  account  of 
political  events ;  the  descriptive  tables  ot  contents  can  be  used 
to  advantage. 

Schuckers,  Jacob  William.  Life  and  Public  Services  of  Sal- 
mon Portland  Chase.  (N.  Y.,  1874.)  —  Contains  extracts  from 
documents  and  letters ;  a  full  biography,  but  not  critical. 

Schurz,  Carl.  Life  of  Henry  Clay.  (2  vols.  5th  ed.,  Boston 
and  N.  Y.,  1888.)  —  An  excellent  biography,  but  the  tariff  con- 
tests, 1820-1830,  are  not  brought  into  prominence  ;  see,  however, 
Vol.  II  for  the  period  1833- 1837. 

Stevens,  John  Austin.  Albert  Gallatin.  (4th  ed.,  Boston, 
1886.)  —  The  author  was  equipped  by  business  training  to  treat 
of  finance.     See  chapter  6  for  period  1801-1812. 

Sumner,  William  Graham.  Alexander  Hamilton.  (In  "Makers 
of  America"  series,  N.  Y ..  1890.)  —  A  critical  and  almost  harsh 
study  of  Hamilton  ;  very  valuable  to  the  student  of  finance. 

Sumner,  William  Graham.  Andrew  Jackson.  (Boston,  etc. 
new  ed.,  1899.)  —  Shows  wide  reading  in  contemporary  docu- 
ments ;  treats  of  land,  internal  improvements,  tariff,  second  U.  S. 
Bank,  and  currency. 

Tvler,  Samuel.  Memoir  of  Roger  Brooke  Taney,  Chief  Justice 
of  the  Supreme  Court  of  the  United  States.  (Baltimore,  1872. 
Rev.  ed.,  1876.) 

II.  Financial  Histories 

There  are  but  few  histories  devoted  exclusively  to  public  finance; 
only  one,  indeed,  that  by  Bolles,  covers  the  general  field  over  an 
extended  period.  The  reader  must  therefore  rely  upon  works  on 
taxation,  the  tariff,  coinage,  and  banking,  and  for  special  topics  and 
episodes  will  often  find  the  most  satisfactory  treatment  in  the  polit- 
ical histories  and  biographies  already  referred  to.  The  following 
volumes  represent  those  which  are  most  general  in  their  treatment ; 
of  these  the  works  of  Bolles  and  Noyes  are  especially  to  be  recom- 


xii  Suggestions  for  Students,   Etc. 

mended  ;  the  narrative  by  Bolles  stops  with  1885,  while  the  smaller 
work  by  Noyes  is  confined  to  the  period  1865—1895.     There  is  a 
great  need  of  detailed  works  on  the  expenditures  of  the  govern- 
ment and  the  various  phases  of  treasury  administration. 
Adams,  Ephraim  D.     The  Control  of  the  Purse  in  the  United 
States  Government.     (Reprinted  from  the  Kansas  University 
Quarterly,  April,  1894.)  — An  academic  study  of  the  debates  in 
Congress  on  the  interpretation  of  constitutional  provisions  relat- 
ing to  treasury  management,  loans,  taxation,  and  money  bills. 
Careful  references  are  given. 
Bolles,  Albert  Sidney.    American  Finance,  with  Chapters  on 
Money  and  Banking.     (N.  Y.,  1901.)  —  Especially  valuable  on 
expenditures ;   treats  also  of    State   finance.      A  discussion   of 
present  conditions  rather  than  historical. 
Bolles,  Albert  Sidney.     The  Financial  History  of  the  United 
States.     (2d  ed.     N.  Y.,  1884-1886.    3  vols.)  —  Vol.  I  includes 
the  period  1 774- 1 789:   11,1789-1860;  111,1861-1885.    The  only 
single  work  which    covers   an    extensive   period ;    it  represents 
research,  and  is  closely  restricted  to  questions  of  finance ;    no 
attempt  is  made  to  sketch  in  the  political  and  social  background, 
and  the  reader  may  be  confused  without  preliminary  reading. 
The  author  leans  to  protection,  and  takes  the  banker's  point  of 
view  in  questions  of  currency.     The  work  is  especially  valuable 
for  chapters  on  accounting  and  expenditures.     Referred  to  as 
Bolles. 
Bourne,  Edward  Gaylord.     The  History  of  the  Surplus  Reve- 
nue of  1837.     (N.  Y.,  etc.,   1885.)  —  A   brief,  scholarly  mono- 
graph with  abundant  references  and  bibliography.     In  addition 
to  the  historical  account,  it  summarizes  the  earlier  proposals  of 
distribution  of  surplus  funds  in  the  treasury. 
Bronson,  Henry.     Historical  Account  of  Connecticut  Currency, 
Continental  Money,  and  the  Finances  of  the  Revolution.     (In 
New   Haven    Colony  Hist.  Soc.  Papers,  Vol.  I.     New   Haven, 
1865.)  — This  is  more  than  a  local  study;    the  author  is  drawn 
into  a  general  review  of  the  financial  measures  of  the  Revolu- 
tionary War.     The  essay  is  scholarly  and  the  stvle  vigorous. 
Bullock,  Charles  Jesse.    Finances  of  the  United  States,  1775- 
1789,  -with  Especial  Reference  to  the  Budget.     (Madison,  1895. 
Univ.  of  Wisconsin.     Bulletin,  Economics,  etc.,  Vol.  I,  No.  2.) 
—  The  best  monograph  on  the  finances  of  the  Revolutionary 
period,  with  bibliographies  at  the  beginning  of   each  chapter. 
Indispensable  to  the  advanced  student. 


Suggestions  for  Students,   Etc.         xiii 

Kearny,  John  Watts.  Sketch  of  American  Finances,  1789- 
1835.  (N.  Y.,  1887.)  —  A  brief  study  of  150  pages,  clear  and 
helpful  in  questions  concerning  the  treatment  of  the  debt.  Little 
attention  is  given  to  taxation. 

Noyes,  Alexander  Dana.  Thirty  Years  of  American  Finance, 
1865-1896.  (N.  Y.,  etc.,  1898.)  —  Treats  the  earlier  period  very 
briefly,  but  is  of  special  value  for  1 878-1 895.  Relation  of  public 
finance  to  the  money  market  is  given  prominence. 

Schuckers,  Jacob  William.  Brief  Account  of  the  Finances 
and  Paper  Money  of  the  Revolutionary  War.  (Philadelphia, 
1874.)  — The  style  is  somewhat  rhetorical,  and,  while  the  writer 
has  on  the  whole  chosen  sound  authorities,  the  essay  does  not 
indicate  a  very  wide  research.  Is  an  interesting  account  within 
a  moderate  space. 

Scott,  William  A.  The  Repudiation  of  State  Debts.  (N.  Y., 
etc.,  1893,)  —  Chapters  2-6  are  historical,  describing  various  acts 
of  repudiation  in  twelve  States.  Of  value  as  explaining  some  of 
the  remote  influences  affecting  federal  credit,  1825-1850. 

Spaulding,  Elbridge  Gerry.  History  of  the  Legal  Tender 
Paper  Money  issued  during  the  Great  Rebellion.  (Buffalo, 
1869.)  —  The  title  is  hardly  accurate;  the  volume  is  largely  a 
collection  of  documents,  speeches,  etc.,  relating  to  the  legal 
tender  acts. 

Sumner,  William  Graham.  The  Financier  and  Finances  of  the 
American  Revolution.  (N.  Y.,  1891.  2  vols.)  —  Contains  a 
mine  of  valuable  material,  but  is  not  clearly  arranged. 

Sumner,  William  Graham.  A  History  of  American  Currency. 
(N.  Y.,  1876.)  —  A  series  of  topical  notes  designed  for  reference 
rather  than  consecutive  reading. 

Wells,  David  Ames.  Practical  Economics.  (N.  Y.,  etc.,  1885.) 
—  Treats  of  the  silver  question,  tariff  revision,  and,  most  valuable 
of  all,  experience  of  the  United  States  in  taxing  distilled  spirits, 
subsequent  to  the  Civil  War. 

Will,  Thomas  Elmer.  Outline  of  the  Financial  History  of 
the  United  States,  published  in  the  Industrialist.  (Manhattan, 
Kan.,  1898-1899).  —  Author  is  a  strong  advocate  of  silver 
coinage. 

III.   Paper  Money,  Banking,  and  Loans. 
The   list  of  titles  on  particular  questions  of   American  finance 
could  be  made  very  extensive.     The  tariff  and  money  have  been 
at  one  time  or  another  subjects  of  party  struggle,  and  given  rise  to 


xiv         Suggestions  for  Students,   Etc. 

an  interminable  amount  of  controversial  writing  in  pamphlets,  gov- 
ernmental reports,  magazine  articles,  speeches,  and  addresses. 
Much  of  this  is  of  little  value,  and  yet  it  has  to  be  taken  into 
account  in  order  to  understand  the  kind  of  reasoning  which  has 
appealed  to  American  democracy,  and  which  in  the  mass  has 
powerfully  affected  the  general  trend  of  public  action.  With  a 
full  appreciation  of  the  mischief  which  may  result  from  indiscrim- 
inate reading,  an  endeavor  has  been  made  in  the  reference  lists  of 
the  several  chapters  to  present  various  points  of  view.  The  follow- 
ing selected  list,  however,  is  restricted  to  volumes  which  deal  with 
facts  rather  than  with  theories  ;  if  it  be  urged  that  these  volumes 
are  too  one-sided  in  their  method  of  interpretation,  the  answer  is 
that  thus  far  the  advocates  of  opposing  theories  have  not  devoted 
attention  to  historical  exposition. 

The  reader  must  also  bear  in  mind  that  this  volume  does  not 
include  a  narrative  of  bank  currency  or  of  coinage.  The  limits  of 
the  work  do  not  permit  it,  even  if  there  were  a  logical  reason  for 
their  inclusion.  Fortunately,  finance  has  a  restricted  definition 
which  has  been  taken  advantage  of  in  outlining  the  proportions  of 
this  study.  The  boundaries  of  banking  and  coinage  often  touch 
upon  the  borders  of  finance,  and  the  more  frequent  excursions  the 
reader  can  make  into  this  outlying  territory,  the  larger  will  be  his 
experience  and  the  more  penetrating  his  powers  of  interpreting 
matters  relating  to  the  public  purse. 

For  facts  regarding  loans,  the  history  by  Bayley  and  the  collec- 
tion of  Laws,  edited  by  Dunbar,  are  of  the  highest  importance ; 
the  first  for  the  clear  presentation  of  the  statistics  of  loans,  and  the 
second  for  the  statutory  provisions  governing  their  issue.  On  the 
more  special  topic  of  treasury  notes  the  history  of  United  States 
Notes,  by  Knox,  easily  stands  first ;  for  that  of  local  banking  the 
encyclopaedic  work  of  Sumner  should  be  consulted,  and  for  a  criti- 
cal appreciation  of  the  national  banking  system  the  single  chapter 
of  Dunbar's  work,  in  Chapters  on  the  Theory  and  History  of  Bank- 
ing, is  suggested  as  the  most  useful.  The  more  general  work  by 
White,  on  Money  and  Banking,  and  the  Report  of  the  Monetary 
Commission,  prepared  by  Laughlin,  also  deserve  special  recogni- 
tion.    These  two  latter  deal  with  the  most  recent  developments. 

Adams,  Henry  Carter.  Public  Debts.  (N.  Y.,  1887.)  —  An 
essay  in  finance  rather  than  a  history ;  but  there  is  frequent 
suggestive  reference  to  American  experience. 

American  Bankers'  Association,  1875-1889.  (N.  Y.,  1890.  2  vols.) 
—  A  series  of  annual  reports ;  volumes  subsequent  to  1889  can  be 


Suggestions  for  Students,   Etc.  xv 

secured  through  the  secretary  of  the  association.  The  proceed- 
ings are  also  now  published  in  the  Bankers'  Magazine.  It 
contains  many  valuable  addresses  on  the  currency,  which  are 
presented,  as  might  be  expected,  from  the  banker's  point  of  view. 

BAYLEY,  Rafael  A.  History  of  the  National  Loans  of  the  United 
States  from  July  4,  1776,  to  June  30,  1880.  (In  Vol.  VII,  loth 
Census  of  the  U.  S.,  1880,  pp.  295-486;  also  published  sepa- 
rately.) —  References  are  to  the  paging  in  the  Census  volume. 
Describes  the  conditions  under  which  each  loan  was  made,  with 
tables  of  annual  issues  and  redemptions;  a  work  of  the  highest 
value  to  the  specialist.     Referred  to  as  Bayley. 

Bullock,  Charles  Jesse.  Essays  on  the  Monetary  History  of 
the  United  Slates.  (N.  Y.,  etc.,  1900.)  —  Part  I.  is  a  general 
survey  of  national  experience  with  "  cheap  money,"  especially 
valuable  for  abundant  references  in  foot-notes;  Parts  II.  and 
III.  are  monographs  on  the  paper  currencies  of  North  Carolina 
and  New  Hampshire.     Referred  to  as  Bullock. 

Catterall,  Ralph  C  H.  The  Second  Bank  of  the  United 
States.  (University  of  Chicago  Press,  Chicago,  1903.)  —  Val- 
uable ;  based  upon  a  study  of  the  papers  of  Nicolas  Biddle. 

Clarke,  Matthew  St.  Clair,  and  Hall,  David  A.  Legislative 
and  Documentary  History  of  the  Batik  of  the  United  States. 
(Washington,  1832.)  —  A  collection  of  reports  and  debates  in 
Congress.  The  history  of  the  final  attack  on  the  bank  is  not 
included. 

Cleveland,  Frederick  A.  The  Bank  and  the  Treasury. 
(N.  Y.,  1905.) — Deals  particularly  with  recent  plans  for  cur- 
rency reform. 

Conant,  Charles  A.  A  History  of  Modern  Banks  of  Issue. 
(N.  Y.,  1897.)  —  Chapters  13-15  treat  of  the  Bank  of  the  United 
States,  State  banking  systems,  and  the  national  banking  system. 
The  later  chapters  give  an  account  of  the  crises  of  the  nineteenth 
century;  see  especially  chapter  22  for  the  crisis  of  1893. 

De  Knight,  William  F.  History  of  the  Currency  of  the  Country 
and  of  the  Loans  of  the  United  States  from  the  Earliest  Period 
to  June  30,  1900.  (2d  ed.  Washington,  1900.  pp.  277.)  — 
Prepared  under  the  direction  of  the  Registrar  of  the  Treasury. 
Not  so  clear  as  the  work  of  Bayley,  but  covers  a  later  period. 
Referred  to  as  De  Knight. 

Dunbar,  Charles  Franklin.  Laws  of  the  United  States  relat- 
ing to  Currency,  Finance,  and  Banking  from  1789  to  1891. 
(Boston,   1 891.)  —  A   necessary   handbook   for   the    student  of 


xvi         Suggestions  for  Students,  Etc. 

finance  ;  contains  the  important  parts  of  our  national  legislation 
respecting  currency,  coinage,  loans,  and  banking,  carefully  anno- 
tated and  classified.     Referred  to  as  Dunbar. 

Dunbar,  Charles  Franklin.  Chapters  on  the  Theory  and 
History  of  Banking.  (N.  Y.,  etc.,  1896.)  —  The  clearest  expo- 
sition of  the  theory  of  banking,  with  reference  to  American  prac- 
tice.    Chapter  9  is  devoted  to  the  national  banking  system. 

Dunbar,  Charles  Franklin.  —  Economic  Essays.  (X.  V., 
1904.)  —  A  collection  of  scholarly  essays,  with  a  few  new  papers 
on  state  banks  and  crises. 

Elliot,  Jonathan,  editor.  The  Funding  System  of  the  United 
States  and  Great  Britain.  (Washington,  1845.)  —  A  valuable 
collection  of  public  documents  relating  to  the  public  debt,  for  the 
period  1 775-1843.  There  is  a  serviceable  index.  This  report 
constituted  Document  No.  15,  H.  R.,  28th  Cong.,  1st  Sess. 

Gouge,  William  M.  Short  History  of  Paper  Money  and  Bank- 
ing in  the  United  States,  including  an  Account  of  Provincial 
Continental  Paper  Money.  (Philadelphia,  1833.) — Part  H- 
contains  an  historical  treatment,  and  within  a  narrow  compass  a 
large  amount  of  contemporary  evidence  in  regard  to  the  abuses 
of  local  banking. 

Knox,  John  Jay.  History  of  Banking  in  the  United  Stales. 
(N.  Y.,  1900.)  —  Only  a  portion  of  the  work  was  prepared  by  Mr. 
Knox  ;  the  chapters  are  of  unequal  value,  but  contain  much 
material  otherwise  inaccessible. 

Knox,  John  Jay.  United  States  Notes.  (3d  ed.  N.  Y.,  1894.)  — 
A  model  book,  and  not  likely  to  be  displaced  ;  contains  a  history 
of  all  issues  of  paper  money  by  the  government.  Of  interest 
are  the  facsimiles  and  forms  of  treasury  notes.  In  the  appendix 
is  the  legal  tender  decision  of  1884.     Referred  to  as  Knox. 

Laughlin,  J.  Laurence.  Report  of  the  Monetary  Commission 
of  the  Indianapolis  Convention.  (Chicago,  1898.)  —  Of  great 
value  to  the  student.  For  historical  treatment,  see  pp.  197-223 
on  the  national  banking  system,  and  Part  III.  on  demand  obliga- 
tions.    Appendix  contains  copies  of  laws  and  valuable  tables. 

Mitchell,  Wesley  Clair.  A  History  of  the  Greenbacks.  (Chi- 
cago, 1903.)  — An  authoritative  study  of  the  history  of  the  issues 
and  the  economic  consequences  of  the  legal-tender  acts. 

Phillips,  Henry,  Jr.  Historical  Sketches  of  the  Paper  Currency 
of  the  American  Colonies  prior  to  the  Adoption  of  the  Federal 
Constitution.  (Roxbury,  Mass.,  1865-6.  2  vols.)  —  Represents 
a  careful  antiquarian  research,  and  is  the  most  detailed  account 
in  print.     Contains  bibliographies  and  lists  of  issues. 


Suggestions  for  Students,   Etc.        xvii 

Richardson,  William  Adams.  Practical  Information  concern- 
ing the  Public  Debt  of  the  United  States,  with  the  National 
Banking  Laws.  (Washington,  1872.)  —  Of  value  for  its  tech- 
nical information  in  regard  to  terms  of  bond  issues. 

Sumner,  William  Graham.  History  of  Banking  in  the  United 
States  (Vol.  I.  of  History  of  Banking  in  all  the  Leading  Nations; 
compiled  by  thirteen  authors :  N.  Y.  Journal  of  Commerce,  1896.) 
Author  has  worked  from  first  sources,  and  is  severe  in  his 
criticism  of  early  banking  methods;  there  is  a  lack  of  recogni- 
tion of  social  and  political  conditions.  The  work  practically 
stops  with  1863,  as  only  a  few  pages  are  given  to  the  national 
banking  system. 

Upton,  Jacob  Kendrick.  Money  in  Politics.  (Boston,  1884.) 
—  Historical  chapters  from  colonial  period  to  1884.  Author  was 
once  Assistant  Secretary  of  the  Treasury ;  a  useful  compen- 
dium. 

White,  Horace.  Money  and  Banking  illustrated  by  American 
History.  (Boston  and  London,  1902.)  —  Is  written  in  an  enter- 
taining and  scholarly  style,  and  is  one  of  the  best  books  on  the 
subject  Author  is  opposed  to  legal  tender  paper  money.  Re- 
ferred to  as  H.  White. 


IV.  Coinage  and  Silver  Question. 

Laughlin,  J.  Laurence.  The  History  of  Bimetallism  in  the 
United  States.  (4th  ed.  1897.)  —  Is  a  standard  work;  con- 
tains valuable  statistics  and  extracts  from  speeches.  Author  is 
a  prominent  gold  monometallism 

Linderman,  Henry  Richard.  Money  and  Legal  Tender  in  the 
United  States.  (N.  Y.,  1877.)  —  Presents  in  brief  form  the 
laws  relating  to  coinage,  legal  tender,  and  money  standards ; 
definitions  of  technical  terms  are  clear  and  concise. 

Russell,  Henry  B.  International  Monetary  Conferences.  (N.Y., 
etc.,  1898.)  —  Is  not  intended  to  advance  any  theory,  but  tells 
the  story  of  the  conferences  and  the  intervening  monetary  events 
of  importance. 

Taussig,  Frank  W.  The  Silver  Situation  in  the  United  States. 
(N.  Y.,  1893.  Also  published  as  Vol.  VII,  No.  1,  of  the  Publi- 
cations of  the  American  Economic  Association,  Jan.,  1892.)  — 
A  clear  and  brief  monograph  on  the  silver  question  from  1878  to 
1892.     The  "argument  for  silver  "  is  analyzed. 


xviii       Suggestions  for  Students,   Etc. 

Watson,  David  K.  History  of  American  Coinage.  (N.  Y., 
etc.,  1899.)  —  Is  a  history  of  legislation  and  legislative  opinion 
rather  than  of  the  art  of  minting . 

V.  Tariff  and  Internal  Revenue. 

For  information  on  the  industrial  results  of  taxation,  and  partic- 
ularly of  the  tariff,  the  reader  must  seek  elsewhere ;  this  volume  is 
confined   to   a  view  of  taxation  as  a  source  of  treasury   supply. 
Fortunately,  the  relations  of  industry  to  the  tariff  have  been  em- 
phasized in  the  standard  history  by  Taussig,  and  this  should  be 
freely  consulted  at  every  stage  of  the  narrative.     Several  of  the 
volumes  treat  of  the  development  of  tariff  arguments.     For  internal 
revenue  the  volume  by  Howe  is  the  standard  work. 
Adams,  Henry  Carter.     Taxation  in  the  United  States,  1789- 
1816.    {Johns  Hopkins  Univ.  Studies,  II,  Nos.  5,  6.     Baltimore, 
1884.)  —  A  scholarly  study,  which  has  not  been  displaced. 
Elliott,  Orrin  Leslie.     The  Tariff  Controversy  in  the  United 
States,  1789-1833,  with  a  Summary  of  the  Period  before  the 
Adoption  of  the  Constitution.     (Leland  Stanford,  Jr.,  Univer- 
sity Monographs.     History  and  Economics,  No.  1,  Sept.,  1892. 
Palo  Alto,  Cal.)  —  Generous  extracts  are  made  from  the  debates  ; 
devoted  to  opinion  rather  than  to  industrial  results. 
Grosvenor,  W.  M.     Does  Protection  Protect?     (N.  Y.,   1871.) 
—  A  criticism  of  protection,  based  upon  a  statistical  study  of  the 
growth  of  industries;  valuable  for  its  tables. 
Hill,  William.     First  Stages  of  the  Tariff  Policy  of  the  United 
States.     {Pub.    American   Economic  Association,   Vol.    VIII, 
No.  6.     Baltimore,  1893.)  —  A  thorough  study  of  colonial  tariffs 
and  act  of  1789;  explains  causes  which  affected  public  opinion. 
Howe,  Frank   C.      Taxation  and  Taxes  in  the   United  States 
under  the  Internal  Revenue  System,  1791-1895.      (N.  Y.,  etc., 
1896.) — The  only  complete  study  of  the  subject,  and  designed 
for  the  special  student. 
Rabbeno,  Ugo.      The  American    Commercial  Policy.     (2d   ed. 
London,  etc.,  1895.)  —  A  fair  treatment  of  our  commercial  policy 
from  colonial  times. 
Stan  wood,   Edward.     American    Tariff  Controversies  in   the 
Nineteenth  Century.     (N.  Y.,  1903.     2  vols.)  — A  valuable  his- 
tory.    Referred  to  as  Stanwood. 
Sumner,  W'illiam  Graham.    Lectures  on  the  History  of  Pro- 
tection in  the  United  States.     (N.  Y.,  1884.)  —  Five  lectures  de- 
livered before  the  International  Free-Trade  Alliance  ;  polemical 
as  well  as  historical. 


Suggestions  for  Students,   Etc.         xix 

Taussig,  Frank  W.  The  Tariff  History  of  the  United  States. 
(4th  ed.  N.  YM  etc.,  1898.)  —  The  best  volume  on  the  subject ; 
although  emphasis  is  placed  upon  the  benefits  of  commercial 
freedom,  there  is  an  entire  absence  of  controversial  bias.  Valu- 
able for  analysis  of  industrial  results. 

Thompson,  Robert  Ellis.  Protection  to  Home  Industry.  (N.Y., 
1886.)  —  Four  lectures  delivered  at  Harvard  University.  Pro- 
tectionist point  of  view ;  controversial  rather  than  historical. 

Public  Documents  on  the  Tariff. 

Customs  Regulations  of  the  United  States  presented  for  the  Instruc- 
tion and  Guidance  of  Officers  of  Customs.  (Treasury  Document 
No.  2153.  Washington,  1900.)  —  An  exhaustive  index  of  present 
administrative  practice. 

Tariff  Acts  passed  by  the  Congress  of  the  United  States  from  1789 
to  1897.     Robert  G.  Proctor,  compiler.   (Washington,  1898.) 

Tariff  on  Imports  in  the  United  States,  etc.,  and  the  Free  List, 
together  with  Cotnparative  Tables  of  Present  and  Past  Tariffs. 
(Report  No.  12,  Senate,  48th  Cong.,  1st  Sess.  Washington, 
1884.)  —  Contains  a  full  index  of  articles  on  which  duties  have 
been  imposed,  17S9-1884. 

Treasury  Decisions  under  Tariff,  Internal  Revenue,  Immigration, 
Navigation  Laws,  etc.  (Issued  weekly  by  the  Treasury  Depart- 
ment.    Washington,  1897-1906.  12  vols.) 

Young,  Edward.  Special  Report  on  the  Customs-Tariff  Legisla- 
tion of  the  United  States.  (Washington,  1874.  Bureau  of 
Statistics,  Treasury  Department.)  —  Contains  brief  synopses  of 
debates,  and  abstracts  of  most  important  schedules  in  the  earlier 
tariff  acts;  also  votes  by  States  on  the  several  acts,  with  com- 
parative statements  of  rates  of  duties. 

VI.  Treasury  Administration. 

There  is  great  need  of  a  comprehensive  work  on  fiscal  adminis- 
tration in  all  its  branches.  The  work  of  Goss  is  satisfactory  for  a 
portion  of  the  field,  —  customs  administration  ;  and  those  of  Kinley 
and  Phillips  adequately  treat  of  the  custody  of  public  funds  and 
the  relation  of  public  funds  to  the  money  market.  No  one  work, 
however,  presents  in  a  systematic  form  the  powers  and  actual 
duties  of  the  several  treasury  officials,  the  method  of  preparing  the 
budget,  the  system  of  accounting,  and  the  technical  management  of 
loans  ;  on  all  these  points  the  reader  must  in  a  large  measure  rely 
upon  Bolles.  whose  work  does  not  extend  beyond  1885. 


xx  Suggestions  for  Students,   Etc. 

Goss,  John  Dean.  The  History  of  the  Tariff  Administration  in 
the  United  States.  {Studies  in  History  and  Economics,  and 
Public  Law  of  Columbia  College,  Vol.  I,  No.  2.     N.  Y.,  1891.) 

—  Excellent  monograph  in  brief  compass  on  methods  of  entry, 
appraisement,  classification,  etc. 

Kinley,  David.  The  History,  Organization,  and  Influence  of  the 
Independent  Treasury  System  of  the  United  States.  (N.  Y.,  etc., 
1893.)  — A  scholarly  work  showing  the  relation  of  the  indepen- 
dent treasury  to  business  and  crises.  Author  favors  a  reorganiza- 
tion of  the  banking  system  to  replace  the  independent  treasury. 

Mayo,  Robert.  The  Treasury  Department  in  its  Various  Fiscal 
Bureaus ;  their  Origin,  Organization,  and  Practical  Operations. 
(Washington,  1847.)  —  Is  a  compendium  of  technical  forms, 
books,  and  duties  of  the  several  officials.  Not  of  present  appli- 
cation, but  historically  of  interest. 

Phillips,  John  Burton.  Method  of  Keeping  the  Public  Money 
of  the  United  States.  (In  Publications  of  the  Michigan  Political 
Science  Association,  Vol.  IV,  No.  3.     Ann  Arbor,  Dec,  1900.) 

—  A  careful  study  of  actual  practice,  1789-1900.      Many  refer- 
ences in  foot-notes. 

VII.  Documents,  Statistics,  Sources,  and  Periodicals. 
The  amount  of  documentary  material  bearing  upon  the  finances 
of  the  United  States  is  very  great ;  a  complete  list  would  include  a 
generous  portion  of  all  public  documents  of  the  government ;  only 
a  few  of  the  most  helpful  sources  are  indicated  below.  Of  all  these 
the  most  useful  is  the  annual  Finance  Report,  and  with  this  series 
the  reader  should  early  acquaint  himself.  The  examination  of 
even  a  single  volume,  as,  for  example,  the  latest,  including  the 
report  of  the  Secretary  of  the  Treasury,  and  the  reports  of  the  sev- 
eral bureaus,  will  vitalize  the  subject  as  no  amount  of  general  read- 
ing will  accomplish.  Next  in  value  are  the  Statistical  Abstract 
and  the  Monthly  Summary  of  Commerce  and  Finance. 

Miscellaneous  Documents. 

Annals  of  Congress,  1789-1824.  (Washington,  1834-1856.  42 
vols.)  —  Register  of  Debates  in  Congress,  1824-1837.  (Wash- 
ington, 1825-1837.  29  vols.)  —  The  Congressional  Globe:  con- 
taining Sketches  of  the  Debates  and  Proceedings,  1833-1873. 
(Washington,  1 837-1873.  109  vols.) — Congressional  Record, 
1873-1907.  (Washington,  1873-1907.  41  vols.)  —  The  con- 
gressional debates  are  summarized  in  Abridgment  of  Debates  of 
Congress,  1789-1856,  by  Thomas  H.  Benton.     (N.  Y.,  1857- 


Suggestions  for  Students,   Etc.         xxi 

1861.  16  vols.)  — For  the  general  student  this  is  by  far  the 
most  useful  collection  for  the  earlier  period. 

American  State  Papers  :  Documents,  Legislative  and  Executive, 
1789-1828.  (Washington,  1832.  5  vois.)  —  Is  the  chief  source 
of  documentary  material  for  the  earlier  period,  containing  reports 
of  Secretaries  of  the  Treasury,  reports  of  committees,  memorials, 
and  statistical  tables. 

Reports  of  the  Secretary  of  the  Treasury  of  the  United  States, 
1789-1849.  (Washington,  1837-1851.  6  vols.)  —  The  standard 
collection  of  reports,  and  necessary  for  special  inquiries.  Each 
volume  has  an  index:  I,  1789-1814;  II,  1815-1828;  III,  1829- 
1836;  IV,  1837-1844;  V,  1845;  VI,  1846-1849. 

Report  on  the  Finances.  (Annual  report  of  the  Secretary  of  the 
Treasury,  beginning  with   1849,  bound    as  a  separate  volume.) 

—  This  includes  the  reports  of  the  several  treasury  bureaus, 
among  which  those  of  the  Commissioner  of  Internal  Revenue, 
Comptroller  of  the  Currency,  and  Director  of  the  Mint  are  of 
special  value.  (These  three  reports  are  also  published  sepa- 
rately with  additional  statistical  tables.)  The  Finance  Reports 
are  of  the  first  importance  to  the  student  of  financial  questions, 
and  may  be  generally  secured  by  application  to  the  Treasury 
Department  or  through  the  citizen's  congressman. 

Statistical  Abstract  of  the  United  States.  (Published  by  the 
Bureau  of  Statistics,  Treasury  Department.     First  issue  in  1878.) 

—  Of  special  interest  are  tables  on  receipts  and  expenditures ; 
expense  of  collecting  revenue;  internal  revenue  and  sources; 
money  in  treasury  and  in  circulation  ;  gold  and  silver  coinage 
and  ratio;  national  banks;  merchandise,  exports,  and  imports: 
pensions;  and  postal  service. 

Summary  of  Commerce  and  Finance.  (Published  monthly  by  the 
Bureau  of  Statistics,  Department  of  Commerce  and  Labor, 
Washington.)  — Contains  financial  tables,  clearly  arranged,  and 
occasionally  reinforced  by  useful  diagrams,  relating  to  indebted- 
ness, receipts  and  expenditures,  circulation,  government  deposits, 
and  the  condition  of  the  treasury. 

American  Almanac  and  Repository  of  Useful  Knowledge,  1830- 

1862.  (Boston,  1830-1862.  33  vols.)  —  Contains  statistics  of 
commerce,  expenditures,  etc. 

American  Almanac  and  Treasury  of  Facts,  Statistical,  Financial, 
and  Political,  1878-1889.  Edited  by  A.  R.  Spofford.  (N.  Y., 
1878-1889.)  —  A  standard  statistical  compendium  while  pub- 
lished. 


xxii        Suggestions  for  Students,   Etc. 

American  Annual  Cyclopedia  and  Register  of  Important  Events, 
1861-1874.  (N.  Y.,  1862-1875.  14  vols.)  —  Since  1874  contin- 
ued as  Appletoti's  Annual  Encyclopedia.  The  annual  article 
on  Finance  is  a  useful  summary.  Consult  also  Index,  1861- 
1875,  and  1876-1887.     2  vols. 

Appropriations,  New  Offices,  etc.  Statement  showing  appropria- 
tions, salaries,  contracts  authorized,  and  chronological  history  of 
the  regular  appropriation  bills,  etc.  (Treasury  Department, 
Washington.)  —  Annual  document. 

Combined  Statement  of  the  Receipts  and  Expenditures  of  the 
United  States.  (Published  annually  by  the  Division  of  Book- 
keeping and  Warrants,  Treasury  Department.) — Shows  receipts 
by  States,  and  expenditures  by  each  department  for  salaries, 
ordinary  expenditures,  public  works,  etc. 

Letter  of  the  Secretary  of  the  Treasury  Transmitting  Estimates 
of  Appropriations.     (Annual  publication,  Washington.) 

Statement  of  Balances,  Appropriations,  and  Expenditures  of  the 
Government.  (Published  annually  by  the  Division  of  Book- 
keeping and  Warrants,  Treasury  Department.)  —  Shows  unex- 
pended balances,  appropriations  available,  etc. 

Statement  of  Appropriations  and  Expenditures  for  Public  Build- 
ings, Rivers,  and  Harbors,  Forts,  Arsenals,  Armories,  and  other 
Public  Works  from  1789  to  1882.  (Treasury  Department  Doc- 
ument, No.  373.     Washington,  1882.) 

Unofficial  Sources. 

Hart,  Albert  Bushnell.  American  History  told  by  Contem- 
poraries. (N.  Y.,  etc.,  1 897-1902.  4  vols.)  —  A  compilation  of 
sources.     Referred  to  in  this  volume  as  Hart. 

MacDonald,  William.  Select  Documents  Illustrative  of  the 
History  of  the  United  States,  1776-1861.  (N.  Y.  and  London, 
1898.)  —  Of  special  value  for  documents  on  banking.  Contains 
reprints  of  Hamilton's  reports  and  of  papers  relating  to  the  Bank 
controversy  and  Compromise  Tariff. 

McPherson,  Edward.  Political  History  of  the  United  States 
during  the  Great  Rebellion.    (Washington,  1864.    4th  ed.,  1882.) 

—  Political  History  of  the  United  States  during  the  Period  of 
Reconstruction,  1865-1870.     (Washington,  1871.     3d  ed.,  1880.) 

—  This  work  is  continued  by  a  series  of  Handbooks  of  Politics, 
published  biennially.  Contains  copies  of  bills,  votes,  acts, 
judicial  decisions,  etc. 


Suggestions  for  Students,   Etc.      xxiii 

Pitkin,  Timothy.  A  Statistical  View  of  the  Commerce  of  the 
United  States  of  America.  (Enlarged  ed.,  1835.  New  Haven, 
1817.)  —  References  are  to  the  first  edition.  Statistical  tables 
are  helpful. 

Seybert,  Adam.  Statistical  Annals.  (Philadelphia,  1818.)  Em- 
bracing views  of  the  population,  commerce,  fisheries,  lands,  post- 
office  establishment,  revenues,  mint,  military  and  naval  establish- 
ments, expenditures,  public  debt,  and  sinking  fund  of  the  United 
States  of  America  ;  founded  on  official  documents,  1 789-1818.  — 
Statistical  tables  are  clear  and  well  arranged ;  of  great  aid  to  the 
special  student. 

Thayer,  James  Bradley,  editor.  Cases  on  Constitutional  Law, 
with  Notes.  (Cambridge,  1 895.  2  vols.)  —  See  especially  Vol.  1 1, 
chapter  7,  on  taxation;  chapter  11,  on  money. 

Speeches,  Addresses,  and  Collected  Works. 

Benton,  Thomas  Hart.  Thirty  Years'1  View  from  1820  to  1850. 
(N.  Y.  and  Boston.  1854-1856.  2  vols.) — Contains  many  ex- 
tracts from  speeches,  particularly  on  the  U.  S.  Bank,  surplus, 
and  deposits. 

Calhoun,  John  Caldwell.  Works.  (Ed.  by  Richard  K.  Cralle. 
N.  Y.,  1853-1855.  6  vols.) — Vols.  1 1— IV  contain  speeches  in 
Congress  treating  of  the  currency,  sub-treasury,  surplus,  tariff, 
and  internal  improvements. 

Clay,  Henry.  Works.  (Ed.  with  Life  by  Calvin  Colton.  N.Y., 
1857.  6  vols.)  —  Contents,  Vols.  I— III,  Life  and  Times,  by 
Colton  (1844.  2  vols.  Rev.  ed.,  1856.  3  vols.)  ;  Vol.  IV, 
Private  Correspondence  (1855);  Vols.  V-VI,  Speeches.  Also 
republished  with  introduction  by  Thomas  B.  Reed  (N.  Y.,  1898). 
The  life  by  Colton  is  eulogistic ;  a  useful  bibliography  on  Clay 
is  given  in  Vol.  I,  pp.  34-38. 

Gallatin,  Albert.  Writings,  ed.  by  Henry  Adams.  (Philadel- 
phia, 1879.  3  vols.)  — Vol.  Ill  is  of  most  interest  to  the  stu- 
dent of  finance  ;  contains  the  sketch  of  finances  (1796),  and  the 
essays  on  banking  (1830  and  1841).  All  of  Gallatin's  writings 
on  financial  questions  are  of  the  first  importance. 

Garfield,  James  Abram.  Works,  ed.  by  B.  A.  Hinsdale.  (Bos- 
ton, 1882.  2  vols.)  — Garfield's  speeches  are  scholarly  and 
show  research ;  the  editor's  notes  are  helpful  and  include 
chronological  summaries  of  legislation. 


xxiv       Suggestions  for  Students,   Etc. 

Hamilton,  Alexander.  Complete  Works,  ed.  by  Henry  Cabot 
Lodge.  (N.Y.,  1885-1886.  9  vols.)  —  Vols.  1 1— I II  are  devoted 
to  finance,  and  Vol.  VIII  contains  the  index. 

Richardson,  James  Daniel,  editor.  A  Compilation  of  the 
Messages  and  Papers  of  the  Presidents,  1789-1897.  (Washing- 
ton, 1896-1899.  10  vols.) — References  have  been  freely  made 
to  the  collection  throughout  this  volume,  under  the  title,  Mes- 
sages and  Papers. 

Sherman,  John.  Selected  Speeches  and  Reports  on  Finance  and 
Taxation  from  1859  to  1878.  (N.  Y.,  1879.)  — An  aid  to  the 
special  student. 

Taussig,  Frank  W.,  editor.  State  Papers  and  Speeches  on  the 
Tariff.  (Cambridge,  1892.) — Contains  Hamilton's  Report  on 
Manufactures ;  Gallatin's  Memorial  of  the  Free-Trade  Conven- 
tion;  Walker's  Treasury  Report  of  1845  ;  Clay  and  Webster  on 
the  Tariff  of  1824. 

Webster,  Daniel.  Works.  (Boston,  1851 .  6  vols.)  —  Vols. 
III-V  are  of  immediate  interest  for  finance,  containing  speeches 
in  Congress,  181 5-1850,  treating  of  the  currency,  banking,  sur- 
plus, deficits,  tariff,  and  public  lands. 

Woodbury,  Levi.  Writings,  Political,  Judicial,  and  Literary. 
(Boston,  1852.  3  vols.) — Vol.  I  contains  speeches  on  tariff 
legislation  and  banking  questions,  including  the  removal  of 
deposits. 

Periodicals. 

Bankers'  Magazine.  Rhodes  Journal  of  Banking  and  the  Bankers' 
Magazine  consolidated.  (N.  Y.,  1846-1906.  73  vols.)  —  In  July 
the  Bankers'  Magazine  and  Statistical  Register  united  with 
Rhodes  Journal  of  Banking  under  the  title  of  Rhodes  Journal  of 
Banking  and  the  Bankers'  Magazine  consolidated.  In  January, 
1896,  the  title  of  Bankers'  Magazine  was  resumed  with  sub-title 
as  above.  This  series  is  an  indispensable  aid,  on  account  of 
special  articles,  documentary  material,  and  monthly  tables. 

Bradstreefs.  A  Journal  of  Trade,  Finance,  and  Public  Economy. 
(Issued  weekly.  N.  Y.,  1907.  35  vols.)  —  Comment  and  edito- 
rials make  a  fairly  complete  record  on  public  finance. 

Bulletin  of  the  National  Association  of  Wool  Manufacturers. 
Quarterly.  (Boston,  1869-1906.  36  vols.) — Contains  valuable 
papers  illustrating  the  protectionist  point  of  view. 

Commercial  and  Financial  Chronicle.  (Published  weekly.*  N.  Y.. 
1865-1907.  84  vols.)  —  Editorials  represent  New  York  bankers' 
point  of  view  on  the  relation  of  the  treasury  to  the  money  market. 


Suggestions  for  Students,   Etc.        xxv 

The  Financial  Review.  (Issued  annually  by  the  publishers  of 
the  Commercial  and  Financial  Chronicle.  N.  Y.,  1873.)  —  Of 
special  value  is  the  annual  retrospect  of  United  States  securities, 
course  of  debt,  and  prices  of  bonds. 

The  Journal  of  Commerce  and  Commercial  Bulletin,  consolidated 
1893.  Journal  of  Commerce,  established,  1827;  Commercial  Bul- 
letin, established,  1865.  (Issued  weekly.  N.Y.,  1892.  55  vols.) 
—  The  most  valuable  daily  for  information  concerning  public 
finance. 

Niles'  Weekly  Register  and  Niles'  National  Register.  (Baltimore, 
1811-1848.  73  vols.)  —  Of  great  value  for  the  first  half  of  the 
last  century. 

Sound  Currency.  Monthly,  published  by  Committee  on  Sound 
Currency  of  Reform  Club.  (N.  Y.,  1894-1901.  8  vols.  Now 
quarterly.)  —  Many  of  the  issues  are  reprints  of  special  studies  ; 
lists  of  monetary  literature  are  published  ;  some  of  the  more  im- 
portant issues  published  previous  to  1896  were  gathered  into  a 
volume  known  as  the  Sound  Currency  Red  Book. 

In  addition  to  the  above,  valuable  articles  are  found  in  the  quar- 
terlies devoted  to  political  science  and  economies  :  — 
Annals  of  the  American  Academy  of  Political  and  Social  Sci- 
ence.    (Philadelphia,  1890-1906.     28  vols.) 
The  Journal  of  Political  Economy.     (Chicago,    1 892- 1906.     14 

vols.) 
Political  Science  Quarterly.     (Boston,  [886-1906.     21  vols.) 
The  Quarterly  Journal  of  Economics.     (Boston,   1 886-1906.     20 

vols.) 
The  Yale  Review.     (New  Haven,  1 892-1906.     14  vols.) 

VIII.   Bibliographies  and  Finding  Lists. 

As  a  further  aid  to  the  reader  the  following  special  bibliographies 
are  recommended.     The  list  by  Bogart  and  Rawles  is  of  special 
value  for  the  period  1789-1S65,  and  with  its  aid  the  bibliographies 
in  this  volume  can  easily  be  made  more  comprehensive.     The  use 
of  government  documents  is  still  a  forbidding  task,  but  the  labor 
may  be  lightened  by  consulting  in  advance  the  Aids  by  Lane. 
Bogart,  Ernest  L.,  and  Rawles,  William  A.     Trial  Bibliog- 
raphy and  Outline  of  Lectures  on  the  Financial  History  of  the 
United  States.      (Oberlin,  1901.      pp.   49.)  —  An  excellent  list 
selected  with  discrimination,  with   precise  page  references,  ex- 
tending through  the  Civil  War. 


xxvi       Suggestions  for  Students,   Etc. 

Bowker,  Richard  Rogers,  and  Iles,  George.  The  Reader's 
Guide  in  Economic  and  Political  Science.  (N.  Y.  and  London, 
1891.)  —  Bibliographical,  with  brief  notes  ;  see  especially  pp.  35- 
41  on  money  and  banking;  pp.  54-65  on  protection,  free  trade, 
and  tariff  (p.  56,  references  to  public  documents) ;  pp.  68-73  on 
public  finance. 

Channing,  Edward,  and  Hart,  Albert  Bushnell.  Guide  to 
the  Study  of  American  History.  (Boston,  etc.,  1896.)  —  A  most 
useful  handbook  of  references  to  political  and  economic  topics 
allied  to  finance.  For  special  references  to  financial  subjects, 
see  §§  151,  158,  174,  182-185,  *95>  211.  Does  not  extend  beyond 
the  Civil  War. 

Comprehensive  Index  of  the  Publications  of  the  United  States 
Government,  1889-1893.  (Washington,  1894.)  —  Compiler,  John 
G.  Ames,  was  Superintendent  of  Documents  in  the  Department 
of  the  Interior.  While  not  a  detailed  topical  index,  it  is  indis- 
pensable to  the  student  who  wishes  to  consult  congressional 
documents;  see  particularly,  Silver,  p.  392 ;  Tariff,  p.  416;  Treas- 
ury Department,  p.  427. 

Catalogue  of  Public  Documents  of  the  Fifty-fourth  Congress,  First 
Session,  and  of  all  the  Departmetits  of  the  Government  of  the 
United  States  for  the  Period  from  fuly  1,  1895,  to  fune  30, 1896. 
(Washington,  1898.)  —  Prepared  under  the  supervision  of  the 
Superintendent  of  Documents,  government  printing-office.  This 
index  is  more  easily  used  than  the  foregoing  ;  helpful  cross- 
references  are  given.  See  in  particular  Finance,  etc.,  pp.  220- 
221;  National  Banks,  p.  419;  Reciprocity,  p.  535;  Silver,  pp. 
578-579;  Tariff,  p.  613. 

Catalogue  of  the  Public  Documents  of  the  Fifty-fourth  Congress, 
Second  Session,  etc.,  for  the  Period  fuly  1, 1896,  to  fune  30, 1897. 
(Washington,  1899.)  —  Consult  topics  as  in  foregoing  volume. 

Catalogue  of  the  Documents  of the  Fifty-fifth  Congress,  etc.,  for  the 
Period  from  fuly  1 ,  1897,  to  fune  30, 1899.    (Washington,  1 90 1 .) 

—  See  Bonds  of  the  U.  S.,  pp.  103-105;  Currency,  p.  232;  Cus- 
toms Service,  p.  234.    Consult  other  topics  as  in  previous  volume. 

Lane,  Lucius  Page.  Aids  to  the  Use  of  Government  Publica- 
tions. (Boston,  Vol.  VII,  No.  49,  pp.  40-58.  In  Quarterly  Pub- 
lications of  the  American  Statistical  Association,  March,  1900.) 

—  Contains  a  select  list  of  indexes  of  federal  public  documents, 
and  helpful  advice  as  to  their  use. 

McKee,  T.  H.  Index  to  the  Reports  of  Committees.  (Washington, 
1887.     2  vols.)  —  Author  was  clerk  in  the  document  room,  U.  S. 


Suggestions  for  Students,   Etc.      xxvii 

Senate.  See  lists  of  reports  of  Senate  committees  on  appro- 
priations and  finance;  and  of  the  House  committees  on  appro- 
priations, banking  and  currency,  commerce  (import  duties) ; 
expenditures,  manufactures,  retrenchment,  and  ways  and  means. 

Poole,  William  Frederick,  and  Fletchek,  William  Isaac, 
and  others.  Poole's  Index  to  Periodical  Literature,  1802-1881. 
(Rev.  ed.  Boston,  etc.,  1893.  2  vols.)  —  First  Supplement,  1882- 
1886.  (Boston,  etc.,  1888.)  —  Second  Supplement,  1887-1891. 
(Boston,  etc.,  1893.)—  Third  Supplement,  1892-1896.  (Boston, 
etc.,  1897 .)  —  Fourth  Supplement,  1897-1901.  (Boston,  etc., 
1903.)  —  The  standard  guide  to  periodical  literature:  consult 
especially  Bank  of  United  States  ;  Banks  ;  Banking  ;  Currency  ; 
Silver;  Tariff;   United  States,  Finances  of. 

Poore,  Ben  Perley.  A  Descriptive  Catalogue  of  the  Govern- 
ment Publications  of  the  United  States,  Sept.  5,  1774,  to  March 
4,  1881.  (Washington,  1885.)  —  Not  very  easily  used,  but  the 
only  index  available  for  the  period  as  a  whole. 

IX.   Special  Exercises  and  Investigation. 

In  no  subject  of  applied  economics  is  there  more  abundant  op- 
portunity for  individual  and  special  investigation  than  in  that  of 
American  finance.  As  an  example  of  immediate  interest,  it  is 
suggested  that  the  student  read  the  daily  treasury  statement,  which 
can  be  obtained  by  application  to  the  Treasury  Department,  or  may 
be  found  in  the  columns  of  the  principal  financial  daily  and  weekly 
newspapers.  The  writer  has  secured  useful  results  by  assigning 
to  the  several  members  of  a  class  the  graphic  representation  of 
the  principal  facts  found  in  the  daily  treasury  statement,  such  as 
the  amount  of  cash  in  the  treasury,  the  amount  of  money  in  the 
national  bank  depositories  to  the  credit  of  the  treasurer  of  the 
United  States,  and  the  daily  receipts  and  expenditures.  The  daily 
checking  of  these  and  similar  tables  leads  to  the  development  of  a 
keen  judgment  not  only  as  to  what  is  occurring,  but  as  to  what 
may  occur  on  the  morrow. 

As  illustrating  the  range  of  practical  exercises  which  quickly 
introduce  the  student  to  the  consideration  of  current  questions,  a 
few  subjects  are  suggested  :  — 

1.  The  price  of  government  securities  as  quoted  in  JViles1  Register,  the  Bankers'1 

Magazine,  the  Commercial  and  Financial  Chronicle,  or  Bradstreet's,  with 
reasons  for  fluctuations. 

2.  The  chronological  history  of  a  loan  bill,  as  derived  from  the  Annals  of  Con- 

gress, the  Globe,  or  Record. 

3.  The  history  of  a  loan,  its  issues  and  redemptions. 


xxviii    Suggestions  for  Students,   Etc. 

4.  The  deposit  of  government  funds  in  national  banks  over  a  period  of  years,  and 

the  reasons  for  changes. 

5.  The  history  of  the  tariff  duties  on  a  single  commodity,  as  tea,  wool,  salt,  sugar  ; 

with  this  can  be  combined  a  study  of  import  figures  for  the  same  commodity. 

6.  The  classification  of  expenditures  according  to  a  logical  scheme.     The  expen- 

ditures of  the  government  have  never  been  tabulated  in  a  detailed  and 
systematic  way ;  and  it  is  hoped  that  in  the  near  future  monographs  may  be 
written  devoted  to  an  historical  account  of  the  several  branches  of  public  ex- 
penditures. As  contributory  to  this  larger  work,  much  preliminary  research 
can  be  done  to  advantage  by  the  individual  student. 

7.  The  assignment  of  a  speech  of  a  senator  or  representative  on  some  financial 

question,  with  the  requirement  that  all  facts  be  checked  by  reference  to 
official  documents. 

8.  The  distribution  of  votes  on   a  financial  bill ;   this  is  of  more  value  for  the 

earlier  period  of  our  history,  for  since  the  Civil  War  votes  on  the  tariff  have 
been  strictly  drawn  on  party  lines. 

9.  The  preparation  of  bibliographies  with  special  reference  to  government  docu- 

ments. No  labor  here  is  too  slight ;  the  reports  of  congressional  committees 
are  buried  treasures,  awaiting  energetic  pick  and  shovel. 


Contents. 


Page 

Suggestions  for  Students,  etc ix 

Chapter 

I.   Colonial  Finance. 

i.  References I 

2.  Scope  of  the  Work 2 

3.  Economic  Factors 5 

4.  Expenditures 8 

5.  Taxation 9 

6.  Tariffs  ;  Import  and  Export  Duties     .......  14 

7.  Control  of  Appropriations 17 

8.  Money  and  Coinage 18 

9.  Bills  of  Credit 21 

10.  Loan  Banks 24 

11.  English  Legislation  against  Paper  Currency     ....  28 

1 2.  Taxation  by  England 30 

IE    Revolution  and  the  Confederacy,  1775-1788. 

13.  References    . ^ 

14.  Governmental  Confusion 34 

15.  Issues  of  Bills  of  Credit ;  Continental  Money  .     ...  36 

16.  Depreciation  of  the  Currency 39 

17.  Was  Paper  Money  Necessary? 41 

18.  State  Taxation  and  Requisitions 44 

19.  Domestic  Loans 45 

20.  Foreign  Loans 47 

21.  Financial  Provisions  in  the  Articles  of  Confederation  .  49 

22.  Effort  to  Secure  a  National  Tax 49 

23.  Fiscal  Machinery 52 

24.  Hank  of  North  America 54 

25.  Financial  Collapse,  1783- 1789 56 


xxx  Contents. 

Chapter  Page 

III.  Financial  Provisions  of  the  Constitution. 

26.  References 60 

27.  Financial  Sections  of  the  Constitution 60 

28.  Taxation 62 

29.  Borrowing;  Bills  of  Credit 67 

30.  Coinage 70 

31.  Appropriations       72 

32.  Popular  Objections  to  the  Financial  Powers     ....  73 

IV.  Establishment  of  a  National  System. 

^.  References 75 

34.  Economic  Conditions  in  1789 76 

35.  Tariff  Measures 80 

36.  Principle  of  Protection 84 

37.  Establishment  of  the  Treasury  Department       ....  85 

38.  Internal  Organization  of  the  Treasury  Department  .     .  87 

39.  Funding  of  the  Debt 89 

40.  Assumption  of  State  Debts ' .  92 

41.  Character  of  the  New  Debt 94 

V.   New  Financial  Needs,  1 790-1801. 

42.  References 97 

43.  First  United  States  Bank 98 

44.  .Mint  and  Coinage 101 

45.  Excise  Tax  on  Whiskey 105 

46.  Other  Excise  Duties  ;  Carriage  Tax 106 

47.  Direct  Taxation 109 

48.  Summary  of  Receipts,  1789-1801 no 

49.  Expenditures,  1789-1801 in 

50.  The  Debt,  1 789-1801 112 

51.  Sinking  Fund  ;  Management  of  the  Debt 113 

52.  The  Administrations  of  Hamilton  and  Wolcott    .     .     .  115 

VI.   Economies  and  War,  1801-1816. 

53.  References 118 

54.  Economies  and  Reduction  of  Taxation 119 

55.  New  Demands  upon  the  Treasury 121 

56.  Receipts  and  Expenditures,  1801-181 1 123 

57.  Reduction  of  Debt ;  Sinking  Fund 124 

58.  End  of  the  United  States  Bank 126 

59.  Inadequate  Preparation  for  War     .,,,,,..  128 


Contents.  xxxi 

Chapter  Pack 

VI.  Economies  and  War,  1801-1816  (continued). 

60.  Treasury  Administration,  War  Period 131 

61.  War  Loans 132 

62.  Issue  of  Treasury  Notes 135 

63.  Internal  Revenue  Taxes ;  Other  Taxes 138 

64.  Expenditures  and  Receipts,  1812-1815           141 

VII.   Problems  of  Reorganization  after  War. 

65.  References     .          143 

66.  Currency  Disorder 144 

67.  Establishment  of  the  Second  United  States  Bank     .     .  145 

68.  Career  of  the  Rank,  1816-1819 150 

69.  Local  Banks,  181 5-1830 153 

70.  United  States  Bank,  1823-1829 156 

71.  Constitutionality  of  the  Bank 157 

72.  Issues  of  Banks  Owned  by  States 160 

73.  Tariff  of  1816 161 

74.  Financial  Embarrassments,  1816-1821      ...  .     .  165 

75.  Receipts  and  Expenditures,  1816-1833     ...  .     .  168 

76.  Difficulties  in  Management  of  the  Funded  Debt  .     .     .  170 

VIII.  Tariff   Legislation,  1818-1833. 

77.  References 172 

78.  Struggle  for  Increased  Protection  ;  Tariff  of  1824     .     .  173 

79.  Tariff  of  1828 176 

80.  Intense  Opposition  to  the  Tariff 181 

81.  Tariff  of  1832 183 

82.  Nullification ;  Compromise  Tariff 185 

83.  Problems  of  Customs  Administration 189 

84.  Analysis  of  Tariff  Reasoning '91 

IX.  Attack  upon  the  Bank;  the  Surplus,  1829-1837. 

85.  References *97 

86.  Criticism  of  the  Hank I98 

87.  Unsuccessful  Effort  to  Recharter 201 

88.  Removal  of  the  Deposits 203 

89.  The  Pet  Banks 209 

90.  Change  in  Coinage  Ratio 2I° 

91.  Internal  Improvements 212 

92.  Sales  of  Public  Lands 216 

93.  Surplus  Revenue 217 

94.  Distribution  of  the  Surplus 219 


xxxii  Contents. 

Chapter  Pagk 
X.   Panic  of  1837  and  Restoration  of  Credit. 

95.  References 223 

96.  Speculative  Prosperity 224 

97.  The  Specie  Circular 227 

98.  Panic  of  1837  ;  Suspension  of  Specie  Payments    .     .     .  229 

99.  Distress  of  the  Treasury 231 

100.  Issue  of  Treasury  Notes  and  Loans 234 

10 1.  Independent  Treasury 235 

102.  Tariff  of  1842 237 

103.  Struggle  for  a  New  Hank 239 

104.  State  Repudiation 243 

105.  Receipts  and  Expenditures,  1S34-1846 246 

XI.   Tariff,   Independent  Treasury,  and  State  Banks, 
1 846- 1 860. 

106.  References 248 

107.  Tariff  of  1846 249 

108.  The  Independent  Treasury  Re-established 252 

109.  Finances  of  the  Mexican  War 255 

no.    Commercial  Expansion 256 

in.    Progress  toward  Lower  Duties 257 

112.  Local  Banking,  1837-1861 259 

113.  Tariff  of  1857  ;  Panic 262 

114.  Morrill  Tariff 265 

115.  Receipts  and  Expenditures,  1846-1861 267 

XII.  Civil  War;  Legal  Tenders. 

116.  References 271 

117.  The  Situation  in  i860 .  272 

118.  Appointment  of  Chase ,     .  '.     .  274 

119.  Revenue  Measures,  July,  1861 276 

120.  Placing  the  Loan  of  $1 50,000.000 278 

121.  Suspension  of  Specie  Payments 281 

122.  Issue  of  Legal  Tender  Notes 284 

123.  Convertibility  of  the  Greenback 290 

124.  Depreciation  of  the  Greenback 292 

125.  Gold  Premium 294 

XIII.   Loans,  Taxation,  and  Banking  of  the  Civil  War. 

126.  References 298 

127.  Taxation  in  1861-1862 299 

128.  Increase  of  Taxes 302 


Contents.  xxxiii 

Chapter  pAGE 

XIII.  Loans,  Taxation,  etc.,  of  the  Civil  War  {continued). 

129.  Income  Tax -30c 

130.  Loan  Act  of  February,  1862 306 

131.  Temporary  Indebtedness 309 

132.  Loan  Act  of  March  3,  1863 310 

133.  Short-Time  Notes 312 

134.  Financial  Situation  in  1864 312 

135.  Administration  of  Secretary  Fessenden 314 

136.  Summary  of  Loans 316 

137.  Loan  Policy  of  Chase 317 

138.  Arguments  in  Favor  of  a  National  Banking  System  .     .  320 

139.  National  Banking  Act  of  1863 326 

140.  Receipts  and  Expenditures,  1861-1865 329 

XIV.   Funding  ov  the  Indebtedness. 

141.  References 331 

142.  Character  of  the  Public  Debt  in  1865 332 

143.  Funding  or  Contraction 333 

144.  Theories  of  Resumption 335 

145.  Arguments  against  Contraction 338 

146.  Funding  Act  of  April  12,  1866 340 

147.  Abandonment  of  Contraction 343 

148.  Payment  of  Bonds  in  Currency 344 

149.  Taxation  of  Bonds 350 

150.  The  Refunding  Act  of  1870 352 

151.  Sale  of  Bonds  Abroad 354 

152.  Sinking  Fund 356 

XV.  Greenbacks  and  Resumption. 

1 53.  References    . 359 

154.  Volume  of  Treasury  Notes 360 

155.  Constitutionality  of  Legal-Tender  Notes 362 

156.  Issues  in  Times  of  Peace 366 

157.  Sale  of  Gold 368 

158.  Panic  of  1873 37° 

159.  Resumption  Act  of  1875 372 

160.  Resumption  Accomplished 374 

161.  Greenback  Party 378 

XVI.   Banking  and  Taxation,  1866-1879. 

162.  References 383 

163.  Bank-Note  Circulation 383 


xxxiv  Contents. 

Chapter  Page 

XVI.   BankIiNG  and  Taxation,  1866-1879  (continued). 

164.  Relations  of  the  Banks  to  the  Government 387 

165.  Antagonism  to  the  National  Banking  System  ....  389 

166.  Revision  of  Internal  Revenue  System 391 

167.  Tariff  Changes 396 

168.  Receipts  and  Expenditures,  1866-1879 398 

XVII.   Silver  and  Banking,  1873-1890. 

169.  References 402 

170.  Demonetization  of  Silver 403 

171.  Struggle  for  Free  Coinage;  Bland  Act 405 

172.  Coinage  under  the  Bland  Act 407 

173.  Unsuccessful  Efforts  to  stop  Coinage 409 

174.  Continued  Opposition  to  National  Banks 410 

175.  Decline  in  Bank  Circulation 411 

XVIII.   Surplus  Revenue  and  Taxation.  1880-1890. 

176.  References 414 

177.  Surplus  Revenue 415 

178.  Deposit  of  Funds  in  National  Hanks 417 

179.  Reduction  of  Internal  Revenue  Duties 418 

180.  Tariff  Revision  .     .     .  • 420 

181.  Unsuccessful  Democratic  Tariff  Measures 423 

182.  Increased  Expenditures 426 

183.  Treasury  Purchase  of  Bonds 429 

184.  The  Public  Debt,  1880-1890 431 

XIX.   Silver  and  the  Tariff,  1890-1897. 

185.  References 434 

186.  Silver  Act  of  1890 436 

187.  McKinley  Tariff  of  1890 438 

188.  The  Gold  Reserve  and  its  Decline 440 

189.  Panic  of  1893  ;  Repeal  of  Silver  Purchases 444 

190.  Sale  of  Bonds  for  Gold 447 

191.  Legality  of  the  Bond   Issues 450 

192.  The  Gorman- Wilson  Tariff 455 

193.  Currency  Measures 458 

194.  Struggle  for  Free  Coinage 460 

XX.  Tariff,  War,  and  Currency  Act. 

195.  References 463 

196.  Dingley  Tariff,  1897 463 


Contents.  xxxv 

Chapter  Page 

XX.  Tariff,  War,  and  Currency  Act  (continued). 

197.  Spanish  War  Finance 465 

198.  Currency  Act  of  1900 468 

199.  Redemption  of  Treasury  Notes 469 

200.  National  Banks 471 

201.  Refunding 472 

202.  Receipts  and  Expenditures,  1891-1901 473 

XXI.   Legislation  and  Administration. 

203.  References 477 

204.  Initiative  in  Tariff  Bills 47S 

205.  Appropriation  Bills 483 

206.  Collection  of  Revenue 488 

207.  Custody  of  the  Public  Funds 492 

208.  The  Mint 495 

209.  Supervision  of  Banks 495 

210.  Accounting  System 498 

211.  Public  Debt  Statement 499 

212.  Miscellaneous  Treasury  Bureaus 501 


APPENDIX 503 

INDEX 513 


CHARTS 

I.  Ordinary  Expenditures,  1791-1811    .... 

II.  Ordinary  Expenditures,  1810-1835    .... 

III.  Ordinary  Expenditures,  1836- 1861     .... 

IV.  Local  Bank  Statistics,  1834-1863       .     :     .     . 
V.  Ordinary  Receipts,  1791-1861 

VI.  Ordinary  Receipts  and   Expenditures,  1791- 

1861 

VII.    Premium  on  Gold,  1862-1879 

VIII.  Ordinary  Expenditures,  1866-1882     .... 

IX.  Receipts  from  Internal  Revenue,  1 863-1880  . 

X.    Silver,  1867-1899 

XI.  Receipts  from  Internal  Revenue,  1881-1898  . 

XII.  Ordinary  Expenditures,  1881-1901     .... 

XIII.  Bank  Circulation,  1878-1890 

XIV.  Net  Gold  in  Treasury,  1893-1897      .... 
XV.  Treasury   Notes    Redeemed  in   Gold,  1885- ' 

1900 

XVI.    Composition  of  the  Public  Debt,  1891-1901   . 

XVII.    Ordinary  Receipts,  1861-1901 

XVIII.    Ordinary  Receipts  and   Expenditures,   1861- 

I901 »  »,476 


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Financial     History    of    the 
United   States. 


CHAPTER  I. 
COLONIAL  FINANCE. 

1.  References. 

Bibliographies:  Bogart  and  Rawles,  3-9;  Channing  and  Hart,  284- 
285;  289  (Stamp  Act) ;  A.  M.  Davis,  Currency  and  Banking  in  the  Prov- 
ince of  Massachusetts  Bay,  in  Pub.  of  Amer.  Econ.  Assn.,  Third  Series, 
I,  No.  4,  ch.  XXII;  J.  Winsor,  Narrative  History  of  America,  V,  170- 
177;  and  monographs  referred  to  below  in  fohns  Hopkins  University 
Studies  and  Columbia  College  Sttidies.  The  notes  in  C.  J.  Bullock, 
Monetary  History  of  United  Slates,  furnish  many  references  on  money. 
Fac-simile  cuts  of  paper  money  are  found  in  Winsor  and  in  Davis. 

Commodities  as  Money:  H.  White,  10-22;  S.  W.  Rosendale,  Wam- 
pum Currency,  in  Sound  Currency,  III,  No.  8  (March,  1896);  C.  J. 
Bullock,  7-12;  W.  B.  Weeden,  Indian  Money,  in  J.  H.  U.  Studies,  II, 
385-481. 

Coinage  :  Bullock,  12-28  ;  D.  K.  Watson,  History  of  American  Coin- 
age, 1-7 ;  J.  H.  Hickox,  A  Historical  Account  of  American  Coinage 
(Albany,  1S58,  Plates) ;  S.  S.  Crosby,  Early  Coins  of  America  (Boston, 
1S75,  Plates) ;  C.  H.  Swan,  Jr.,  Spanish  Silver  Dollars  in  Massachusetts, 
in  Sound  Currency,  VI,  73-80;  W.  G.  Sumner,  The  Spanish  Dollar  and 
the  Colonial  Shilling,  in  Amer.  Hist.  Rev.  (July,  1898) ;  W.  G.  Sumner, 
Coin  Shilling  of  Massachusetts  Bay,  in  Yale  Review,  VII,  247,  405. 

Paper  Money:  (i)  Contemporary:  W.  Douglass,  Discourse  con- 
cerning the  Currencies  of  the  British  Plantations  in  America  (1740), 
reprinted  and  edited  by  C.  J.  Bullock,  in  Stud.  Amer.  Econ.  Assn.,  II, 
No.  5  (especially  pp.  305-318);  J.  Wright,  The  American  Aregotiator  of 
the  Various  Currencies  of  the  British  Colonies  in  America  (1761);  South 
Carolina's  First  Paper  Money  (1739),  in  Sound  Currency,  V,  34-45;  B. 
Franklin,  Works  (Bigelow,  ed.),  I,  359-383;  IV,  11-15,  79-94;  A.  B. 
Hart,  American  History,  II,  251-254;  A.  M.  Davis,  Tracts  Relating  to  the 
Currency  of  the  Massachusetts  Bay.  (ii)  General  :  G.  Bancroft,  Plea 
for  the  Constitution,  9-28;  C.  J.  Bullock,  29-59;  W.  Gouge,  Money, 
Part  II,  1-25;  J.  J  Knox,  1-8;  F.  A.  Walker,  Money,  305-326;  H. 
J  I 


2  Colonial  Finance.  [§  2 

White,  120-134;  W.  G.  Sumner,  History  of  American  Currency,  1-43. 
(iii)  Special:  H.  Phillips,  Historical  Sketches  of  the  Paper  Currency  of 
the  American  Colonies  (2  vols.,  1865)  '■>  ^-  F*  McLeod,  Fiat  Money  and 
Currency  Inflation  in  New  England  from  1620  to  1739,  in  Annals  Amer. 
Acad.  Pol.  Sci.,  XII,  57-77  (Sept.,  1898) ;  H.  Bronson,  Historical  Account 
of  Connecticut  Currency,  in  Papers  of  New  Haven  Col.  Hist.Soc,  I  (1865) ; 
J.  G.  Palfrey,  History  of  New  England,  V,  96-109  (Massachusetts) ;  A. 
M.  Davis,  Currency  and  Banking  in  the  Province  of  Massachusetts  Bay,  in 
Pub.  of  Amer.  Econ.  Assn.,  Third  Series,  I,  No.  4  (Dec,  1900,  Plates) ; 
C.  H.  J.  Douglass,  Financial  History  of  Massachusetts,  1 17-135;  S.  S. 
Rider  and  B.  R.  Potter,  Some  Account  of  the  Bills  of  Credit  or  Paper 
Money  of  R.  I,  17 10-1786;  H.  White,  New  York's  Colonial  Currency,  in 
Sound  Currency,  V,  50-64;  C.  J.  Bullock,  207-259  (New  Hampshire), 
125-183  (North  Carolina);  C.  W.  Macfarlane,  Pennsylvania  Paper  Cur- 
rency in  Annals  Amer.  Acad.  Pol.  Sci.,  VIII,  50-126;  P.  A.  Bruce, 
Economic  History  of  Virginia,  II,  ch.  19;  W.  Z.  Ripley,  Financial  His- 
tory of  Virginia,  108-144  (hard  money),  145-166  (paper  money). 

Colonial  Banking:  H.  White,  248-258;  A.  M.  Davis,  Currency 
and  Banking  in  the  Prov.  of  Mass.  Bay;  Part  II,  Banking,  in  Pub.  of 
Amer.  Econ.  Assn.,  Third  Series,  II,  No.  2  (May,  1901),  particularly 
ch.  12;  A.  M.  Davis,  A  Connecticut  Land  Bank  of  the  i&th  Century  in 
Quar.  four,  of  Econ.,  XIII,  70. 

Taxation  :  The  Stamp  Act,  1765,  in  American  History  Leaflets,  No. 
21  (May,  1895);  B.  Franklin,  Works,  IV,  97-m;  288-299;  V,  440-531 ; 
A.  B.  Hart,  American  History, Yl,  394-417;  W.  MacDonald,  Select  Charters, 
272  (Sugar  Act),  281  (Stamp  Act),  322  (Revenue  Act),  327  (Tea  Act) ; 
C.  C.  Plehn,  Introduction  to  Public  Finance,  139-142;  E.  R.  A.  Seligman, 
Income  Tax  in  American  Colonies  and  States,  in  Pol.  Sci.  Quar.,  X,  220- 
247  ;  W.  Hill,  Colonial  Tariffs,  in  Quar.  Jour,  of  Econ.,  VII,  78-100;  O. 
L.  Elliott,  The  Tariff  Controversy,  5-66,  in  Leland  Stanford,  Jr.,  Univ. 
Monographs  Hist.,  No.  1  ;  J.  D.  Goss,  History  of  Tariff  Administration  in 
the  U.  S.,  in  Col.  Coll.  Stud.,  I,  No.  2,  10-23;  W.  C.  Fisher,  American 
Trade  Regulations  before  1789,  in  Papers  of  Amer.  Hist.  Assn.,  ill,  221 ; 
W.  G.  Sumner,  Alexander  Hamilton,  37-52  (taxation  by  England) ;  F. 
R.  Jones,  History  of  Taxation  in  Connecticut,  1636-1776,  in  J.  H.  U. 
Stud.,  XIV,  No.  8;  C.  H.  J.  Douglass  (as  above),  13-95;  J-  c-  Schwab, 
History  of  New  York  Property  Tax,  in  Pub.  Amer.  Econ.  Assn.,  V,  No.  5 ; 
E.  L.  Whitney,  Government  of  the  Colony  of  S.  C,  \x\J.  H.  U.  Stud.,  XIII, 
97-109  ;  W.  Z.  Ripley  (as  above),  1 1-107 ;  P.  A.  Bruce,  Economic  History 
of  Virginia :  H.  L.  Osgood,  New  England  Colonial  Finance,  in  Pol.  Sci. 
Quar.,  XIX,  80-106. 

2.    Scope  of  the  "Work. 

The  term  finance,  according  to  the  precise  academic  defini- 
tion of  modern  authorities,  refers  to  the  receipts  and  expendi- 
tures  of    an    individual,    company,    or    government.       "  The 


§  2]  Scope  of  the  Work.  3 

supply  and  application  of  state  resources  constitute  the  subject 
matter  of  public  finance,"  is  the  definition  given  by  Prof. 
Bastable ;  and  successive  American  writers  on  this  subject, 
Adams,  Plehn,  and  Daniels,  use  the  term  in  substantially  the 
same  sense.  In  the  following  narrative  of  American  experi- 
ence the  expression  "  financial  history "  will  be  given  a 
broader  scope  and  will  include  also  some  consideration  of 
the  monetary  system  of  the  country,  such  as  coinage  and 
bank  issues.  This  extension  is  made  partly  for  convenience, 
since  the  two  subjects  of  money  and  of  finance  in  its  narrow- 
est interpretation  are  related  in  interest  to  the  student  of 
public  affairs ;  and  partly  because  it  is  impossible  to  explain 
the  policy  of  the  government  of  the  United  States,  either  as 
to  expenditures  or  to  income,  without  reference  to  the  devel- 
opment of  public  opinion  and  experience  in  the  management 
of  its  monetary  operations. 

In  no  country  of  the  world  has  national  finance  been  so 
quickly  and  so  violently  affected  by  political  environment 
and  current  economic  experience  as  in  the  United  States. 
This  influence  has  been  due  to  many  causes,  —  in  part  to  the 
sudden  break  with  the  parent  country  in  1775,  leaving  ani- 
mosities which  grew  into  suspicion  or  contempt  for  European 
experience ;  in  part  to  the  abstract  political  philosophy  which 
early  obtained  a  strong  hold  upon  the  reasoning  of  political 
leaders  in  America  and  which  led  to  a  confidence  in  abstract 
ideas  beyond  practical  possibilities ;  and  in  part  to  the  new- 
ness of  our  economic  life  and  the  enormous  scale  on  which 
the  resources  of  the  country  have  been  developed.  A  com- 
plete and  satisfactory  treatment  of  the  financial  history  of  the 
United  States  might  well  involve,  therefore,  the  bases  of  Ameri- 
can political  philosophy  as  expressed  in  constitutional  law  and 
judicial  interpretation,  and  also  a  view  of  the  material  exten- 
sion of  the  country  as  witnessed  in  the  unparalleled  growth 
of  agriculture,  manufactures,  mining,  transportation,  and  foreign 
commerce.  Such  an  extended  treatment  is  obviously  impos- 
sible   within    the    limits   set    for  this   work ;    but   the    reader 


4  Colonial  Finance.  [§  2 

should  be  alert  to  connect  this  narrative  of  financial  measures 
with  the  underlying  forces  of  political  opinion  and  economic 
development. 

The  financial  history  of  the  present  government  of  the 
United  States  has  its  roots  in  the  methods,  experiences,  and 
political  philosophy  of  the  thirteen  colonies.  In  part  the 
revenue  systems  of  those  settlements  were  prescribed  by 
external  authorities  or  inspired  by  non-resident  commercial 
interests ;  in  part  they  were  the  expression  of  local  needs, 
enunciated  by  freemen  slowly  learning  to  legislate  for  them- 
selves. The  colonies  were  established  at  different  times  and 
under  different  impulses,  and  it  is  consequently  natural  that 
they  should  have  tried  a  variety  of  revenue  measures,  for  the 
most  part  crude  and  yet  on  the  whole  not  badly  adapted  to 
new  and  raw  conditions  of  material  life.  Rarely,  except  in 
time  of  war,  were  the  demands  upon  the  colonial  treasuries 
burdensome,  or  excessive,  and  the  adjustment  of  revenue  to 
expenditure  or  of  expenditure  to  revenue  was  easily  made. 
Most  of  the  colonies  fell  into  the  error  of  too  abundant  issues 
of  paper  money  ;  at  first,  to  meet  special  strains,  and,  later, 
in  many  instances  to  discharge  ordinary  obligations  which 
should  have  been  met  by  taxation ;  but  this  error  was  fostered 
by  the  argument  that  the  community  needed  a  greater  supply 
of  money  both  as  loanable  capital  and  as  a  medium  of 
exchange,  —  an  argument  entirely  distinct  from  budgetary 
requirements.  With  the  revolt  against  England  in  the  latter 
part  of  the  eighteenth  century  there  arose  the  necessity  of 
some  national  system  of  finance  to  meet  expenditures  under- 
taken in  a  common  cause,  particularly  in  the  support  of  the 
army.  A  national  system  had  to  be  created  not  only  out  of 
the  varied  and  crude  financial  experiences  of  the  thirteen 
colonies,  but  also  in  a  time  of  political  confusion,  when  there 
was  little  opportunity  for  inquiry,  deliberation,  and  careful 
maturing  of  plans.  Financial  disaster  was  the  result.  During 
the  closing  years  of  the  Revolution  and  after  the  treaty  of 
peace    in    1783    rapid  and    critical    experiments    were  tried, 


§  3]  Economic  Factors.  5 

leading  finally  to  a  new  constitution  which  laid  the  founda- 
tion of  the  present  federal  financial  system  of  the  United 
States.  Introductory  to  the  federal  system  of  finance 
which  will  chiefly  occupy  this  narrative,  two  chronological 
periods  must  therefore  be  considered:  (1)  the  financial 
experiences  of  the  colonies;  and  (2)  the  finances  of  the 
Revolution  together  with  the  transition  experiments  of  the 
Confederacy. 

In  the  treatment  of  colonial  financial  practice  it  will  be 
impossible  to  consider  each  colony  separately,  either  in  fiscal 
organization  or  as  to  ways  and  means  for  getting  revenue. 
The  survey  must  serve  simply  to  disclose  the  more  important 
methods  and  fiscal  instruments  with  which  the  people  of  the 
United  States  had  become  acquainted  on  their  own  soil 
during  the  years  of  preparation  for  their  national  independent 

career. 

3.     Economic  Factors. 

The  economic  life  of  the  colonies  was  extremely  simple, 
and  yet  was  active  in  many  different  ways.  The  settlements 
were  scattered  over  an  extended  seaboard  and  differed  in 
climate  and  natural  resources.  They  differed  also  in  occupa- 
tions ;  besides  the  plantations  of  sugar,  tobacco,  rice,  and 
indigo  in  the  South,  and  the  smaller  farms  of  tillage  and 
pasturage  in  New  England  and  the  middle  colonies,  every- 
where were  fisheries,  forests  of  timber  and  naval  stores,  and 
scattered  outposts  of  hunters  and  trappers.  In  many  ways 
these  wide-spread  communities  were  sufficient  for  the  satisfac- 
tion of  their  own  economic  wants.  With  wonderful  resource- 
fulness the  people  resorted  to  household  manufactures  covering 
an  extended  range  of  commodities,  but  the  standards  of  life 
had  been  so  far  developed  that  each  section  called  for  supplies 
from  abroad,  such  as  English  woollens,  linens,  ammunition, 
and  household  supplies.  The  people  of  New  England  en- 
gaged in  the  manufacture  of  clapboards,  hoops,  shingles, 
and  framed  timber,  which  they  exported  to  the  West  Indies 
in  exchange  for  sugar,  rum,  and  molasses  ;  in  part  these  latter 


6  Colonial  Finance.  [§  3 

commodities  were  used  at  home  and  in  part  they  were  dis- 
posed of  in  other  markets  to  help  settle  the  indebtedness  to 
England.  But,  more  than  all  else,  Northern  settlers  found 
their  security  against  bankruptcy  in  the  construction  of  ships 
and  in  the  fisheries.  Ships  were  exported  to  England ;  and 
fish  were  sent  in  colonial  bottoms  to  Portugal,  Spain,  and 
Italy;  cargoes  were  secured  in  these  countries  for  England, 
and  the  profits  of  this  freighting  did  much  to  settle  the 
international  balance  of  trade. 

The  colonies  of  New  York,  New  Jersey,  and  Pennsylvania 
had  much  the  same  products  as  those  in  New  England,  with 
the  exception  of  fish.  Richer  in  soil  and  warmer  in  climate, 
they  were  able  to  raise  large  quantities  of  wheat  and  other 
grains,  to  manufacture  them  into  flour,  and  easily  to  dispose 
of  them  in  the  West  Indies.  In  payment  the  middle  colonies 
likewise  secured  funds  in  bills  of  exchange  for  use  in  buying 
goods  in  England.  The  products  of  the  Southern  colonies 
were  in  immediate  demand  in  the  mother  country,  and 
hence  the  commerce  of  this  section  was  more  direct. 
It  will  thus  be  seen  that  for  the  economic  prosperity  of 
a  large  part  of  the  settlements  the  trade  of  the  West  Indies 
was  necessary ;  and  as  the  struggle  to  gain  this  trade  was 
keen  the  regulations  prescribed  by  England  were  frequently 
disregarded. 

This  restrictive  legislation,  commonly  called  the  navigation 
laws,  began  in  1660  by  limiting  the  export  market  of  colonial 
sugar,  cotton,  tobacco,  indigo,  ginger,  and  dyeing  woods  to 
the  English  dominions ;  but  gradually  other  commodities,  as 
rice,  naval  stores,  and  furs,  were  placed  upon  the  "  enumerated 
list,"  to  the  great  embarrassment  of  colonial  enterprise.  So, 
too,  the  importation  of  European  goods  was  restricted  to 
British,  that  is,  English  or  colonial  built,  shipping,  laden  in 
England,  thus  requiring  all  American  vessels,  if  importing 
continental  produce,  to  make  an  immediate  clearing  from 
England  itself.  From  these  harsh  regulations  modifications 
were   made  in  permitting  exportations  of  enumerated  goods 


§  3]  Economic  Factors.  7 

not  only  to  the  mother  country,  but  also  to  that  part  of  Europe 
lying  to  the  south  of  Cape  Finisterre,  to  certain  parts  of  Africa, 
and  to  the  West  Indies  in  general.  The  frequent  changes  in 
the  navigation  policy  of  England,  its  interference  with  the 
natural  course  of  trade  to  the  prejudice  of  settlements  strug- 
gling against  odds,  and  the  disrespect  shown  to  law  through 
constant  evasion,  must  be  taken  into  account  in  seeking  for 
an  explanation  for  a  part  of  the  later  antagonism  of  the  colo- 
nies to  the  mother  country.1 

Manufactures  were  but  slightly  developed  outside  of  the 
household  at  any  time  before  the  Revolution.  Labor  was 
expensive,  and  more  profitable  when  directed  to  other  pur- 
suits. There  were  a  few  fulling-mills,  hat-making  establish- 
ments, an  occasional  paper-mill,  charcoal  furnaces  for  pig  iron, 
some  forges  for  making  bar  iron,  and  slitting-mills.  There 
was,  however,  enough  manufacturing  enterprise  to  arouse  the 
fears  of  English  manufacturers,  and  in  a  few  but  important 
instances  to  lead  to  repressive  legislation  in  the  field  of  manu- 
factures, especially  woollens,  hats,  and  iron.  In  spite  of  all 
the  laws  calculated  to  reduce  the  colonists  to  industrial  de- 
pendency, the  settlements  as  a  whole  prospered,  —  as  a  matter 
of  fact,  the  laws  in  many  instances  were  not  enforced  with 
stringency.  The  higher  custom-house  officials,  with  the  con- 
sent of  the  treasury,  were  permitted  to  live  in  England,  and 
treated  their  offices  as  sinecures.  Apparently  the  statesmen 
in  control  of  English  affairs  recognized  that  it  would  be  dis- 
astrous to  the  fortunes  of  the  colonies  to  compel  strict  obedi- 
ence, and  under  this  policy  of  toleration  there  grew  up  a  large 
illicit  but  permitted  trade. 

The  white  population  of  the  colonies  at  about  the  middle 
of  the  eighteenth  century  amounted  to  a  little  over  a  million. 

1  Professor  Ashley  in  a  recent  and  exhaustive  study  concludes,  that, 
with  the  exception  of  the  molasses  business,  the  great  bulk  of  the 
American  trade  was  strictly  legal.  It  is  a  source  of  regret  that  I 
have  not  had  the  opportunity  to  make  an  examination  of  this  subject 
in  accordance  with  the  evidence  submitted. 


8  Colonial  Finance.  [§  \ 

One-third  was  in  New  England,  a  little  more  in  the  middle 
colonies,  and  about  one-quarter  in  the  settlements  south  of 
Pennsylvania.  The  annual  value  of  the  imports  was  about 
^900,000  just  after  the  date  referred  to,  but  it  greatly 
increased  because  of  the  shipments  on  account  of  the  war 
with  France ;  and  the  commercial  interests  of  the  colonists 
were  brought  much  more  prominently  to  the  surface.  The 
exports  did  not  quite  equal  the  imports  in  value  according  to 
the  custom-house  valuations,  and  this  explains  the  constant 
drain  of  specie,  and  the  agitation  for  issues  of  paper  currency 
to  supply  commercial  needs  of  exchange. 

It  is  hardly  necessary  to  add  that  there  were  no  bankers  in 
the  colonies ;  such  functions  of  banking  as  were  then  devel- 
oped were  carried  on  by  merchants.  The  differentiation  of 
commercial  occupations  had  hardly  begun  ;  there  were  few  if 
any  joint-stock  companies,  and  associated  action  on  any  large 
scale  was  unknown.  The  individual  merchant,  when  oppor- 
tunity arose  and  ambition  led,  was  a  factor,  an  exchange-agent 
and  banker,  a  ship-owner,  and,  in  general,  undertook  all  the 
financial  responsibilities  which  are  now  shared  by  several  kinds 
of  corporations  under  forms  of  restricted  liability.  The  indi- 
vidual relied  upon  himself;  he  was  careful,  therefore,  not  to 
get  into  debt,  because  standing  debt  indicated  a  serious  de- 
parture from  right  living,  to  be  punished  by  imprisonment. 
Undoubtedly  the  harsh  provisions  of  the  debtor  laws  which 
were  tenaciously  maintained  long  after  expanding  industry  jus- 
tified the  use  of  credit,  had  much  to  do  with  inspiring  paper 
money  issues,  from  which  it  was  believed  relief  would  come. 

4.      Expenditures. 

Taxation  is  necessitated  by  public  expenditure,  and  this  in 
turn  depends  upon  the  stage  of  refinement  of  civic  life  which 
has  been  developed.  The  colonial  governments  were  of  a 
simple  type.  In  the  early  days  of  settlement  the  support  of 
the  governor  was  probably  the  most  burdensome  single  charge 
placed    upon  a  colony.     The    salaries   of  the  few  executive 


§  5]  Taxation.  9 

assistants  or  heads  of  departments  were  small,  and  in  many 
instances  the  governor  and  inferior  officers  were  paid  by  fees, 
thus  lessening  the  need  of  regular  taxation.  Occasionally 
there  was  additional  expenditure  for  the  support  of  a  colonial 
agent  in  London.  The  legislative  sessions  were  short,  and  the 
pay  of  members  when  allowed  not  large.  The  court-houses 
were  often  handsome  but  never  large,  and  there  was  no  need 
for  a  highly  organized  and  expensive  judiciary.  In  times  of 
peace  there  was  no  local  navy,  not  even  in  the  ship-building 
colonies.  The  military  burden  was  met  for  the  most  part  by 
a  system  of  locally  organized  militia,  the  expenses  of  which 
were  assessed  upon  the  individual  members  or  upon  the  town 
or  county.  No  expensive  public  works  were  undertaken,  the 
demand  being  confined  to  bridges,  highways,  and  a  few  public 
buildings.  Nor  had  there  been  developed  that  class  of  ex- 
penditures, now  so  common,  for  the  satisfaction  of  humanita- 
rian and  social  impulses,  as  for  the  care  of  the  sick,  poor, 
insane,  or  criminals,  except  by  the  local  units  of  administra- 
tion. Only  in  case  of  an  Indian  war  or  conflict  with  France, 
the  great  rival  of  England  on  the  North  American  continent, 
was  any  heavy  demand  made  upon  the  colonial  treasuries ; 
hence  taxation  was  light. 

5.     Taxation. 

The  colonists  were  acquainted  with  taxation  under  two  dif- 
ferent forms.  The  English  government  in  accordance  with  its 
trade  and  navigation  laws  established  a  revenue  or  customs 
service  which  was  entirely  under  its  control,  the  officers  being 
appointed  by  the  Crown.  The  regulations  and  duties  imposed 
under  these  laws  were  primarily  designed  to  protect  the  com- 
merce and  manufactures  of  the  mother  country  rather  than  to 
enrich  the  treasury,  and  the  revenue  thus  collected  at  the  custom 
houses  was  insignificant.  Besides  the  imperial  system  of  tax- 
ation, each  colony  had  its  own  methods  of  raising  revenue  for 
local  needs ;  and  here  may  be  found  the  greatest  variety  of 
taxes,    including    direct   taxes   upon    persons   and    property, 


io  Colonial  Finance.  [§  5 

indirect  taxes  upon  consumption  through  excise  or  internal 
duties,  and  a  system  of  tariff  and  customs  duties  which 
some  of  the  colonies  established  in  addition  to  the  system 
maintained  by  England.  The  administrative  methods  of 
the  colonies  were  simple  and  in  keeping  with  the  immature 
development  of  commerce  and  industry.  In  some  of  the 
colonies  there  was  no  separate  fiscal  organization  for  the 
collection  of  taxes,  the  duty  being  entrusted  to  the  judicial 
machinery,  especially  the  sheriff. 

The  taxing  systems  of  the  colonies  varied  from  each  other 
according  to  the  economic  conditions  of  the  several  sections 
of  the  country ;  they  have  been  conveniently  classified  by 
Seligman  into  three  different  types.  In  the  democratic  com- 
munities of  New  England  we  find  the  primitive  poll  tax  and 
a  tax  on  the  gross  produce  of  the  land,  which  was  finally 
expanded  into  a  general  property  tax ;  to  these  was  then 
added  a  faculty  tax.  In  the  Southern  colonies  with  their 
class  supremacy  the  land  tax  was  naturally  unpopular  among 
the  landholders,  and  taxes  laid  upon  slaves  found  little  favor 
because  they  also  reached  only  the  influential  and  ruling  part 
of  the  community.  Consequently  taxation  was  mainly  indirect 
through  import  and  export  duties.  In  the  middle  colonies 
conditions  cannot  be  so  easily  classified  either  as  democratic 
or  aristocratic ;  the  trading  class  with  Dutch  methods  domi- 
nated, and  this  naturally  favored  the  excise  system  which  had 
been  developed  in  Holland. 

The  New  England  preference  for  property  and  poll  taxes 
was  natural,  for  the  early  settlers  of  these  colonies  left 
England  at  a  time  when  property  and  poll  taxes  were  common 
in  the  form  of  tenths,  fifteenths,  and  subsidies.  For  example, 
Massachusetts  in  1646  enacted  that  a  single  tax  should  equal 
2od.  a  poll  and  id.  in  a  pound  of  property,  in  money  or  its 
equivalent ;  on  this  unit  as  a  basis  the  single  tax  was  doubled, 
trebled,  etc.,  by  the  authorities  as  the  occasion  demanded,  — 
a  practice  which  recalls  the  doubling  or  trebling  of  the  "  fif- 
teenth "    in    England.     In    King  Philip's  War   the  rate   was 


§  5]  Taxation.  1 1 

raised  to  sixteen  units ;  the  average  was,  however,  about  four. 
Such  a  system  of  taxation  was  highly  congenial  in  communi- 
ties where  general  land  ownership  was  normal  and  property 
was  widely  distributed.  Negotiable  securities  were  unknown. 
There  were  no  large  estates  or  division  of  settlers  into  classes 
widely  differing  from  each  other  in  fortune  or  social  attain- 
ments ;  property  was  mainly  in  land,  buildings,  and  cattle, 
contributing  visible  wealth  known  to  all  and  consequently  easy 
to  assess.  Business  transactions  were  limited  in  amount,  and 
of  a  direct  or  simple  character.  To  tax  the  visible,  tangible 
property  was  substantially  to  tax  the  entire  accumulations  of 
the  community,  and  the  varying  value  of  land  was  not  an 
obstacle,  because  as  a  rule  the  early  land  taxes  were  based  on 
product  rather  than  on  value. 

The  poll  tax  was  the  complement  of  the  property  tax : 
each  adult  male  in  Massachusetts  was  valued  at  the  same 
property  sum,  as  for  example,  ,£20 ;  and  the  poll  tax  was 
then  levied  at  a  penny  or  its  multiple  per  pound,  as  in  the 
case  of  the  property  tax.  This  system  of  poll  reduplication 
would  obviously  work  injustice  to  the  poor,  and  under  the 
second  charter  was  discarded. 

Closely  identified  with  and  supplementary  to  the  property 
and  poll  taxes  was  the  faculty  or  income  tax ;  laborers,  arti- 
sans, and  tradesmen  paid  according  to  their  incomes  or 
earnings.  In  the  Massachusetts  law  of  November  4,  1646,  it 
was  ordered  that  "  every  laborer,  artificer,  and  handicraftsman 
that  usually  take  in  summer  time  above  i8d.  by  the  day-wages 
or  work  by  great,  which  by  due  valuation  amounts  to  more 
than  i8d.  by  the  day  shall  pay  per  annum  3s.  4d.  into  the 
treasury  over  and  beside  the  2od.  before  mentioned."  Men 
in  other  callings,  as  smiths,  butchers,  bakers,  etc.,  should  be 
"  rated  proportionable  to  the  produce  of  the  estates  of  other 
men  ;  "  and  again  by  another  act  the  classes  above  mentioned 
were  taxed  on  the  capitalized  value  of  their  wages.  Other 
New  England  colonies  followed  Massachusetts  in  the  taxation 
of  profits ;  and  later  the  faculty  tax  was  introduced  into  Penn- 


1 2  Colonial  Finance.  [§  5 

sylvania,  Delaware,  Maryland,  and  a  few  of  the  Southern  colo- 
nies. The  faculty  tax  of  the  period  under  consideration  was 
not,  however,  a  true  income  tax  in  the  modern  sense ;  individ- 
uals, like  articles  of  personal  property  and  plots  of  land,  were 
arbitrarily  assessed  at  fixed  amounts  according  to  the  occupa- 
tion followed,  and  in  some  cases  the  tax  became  antiquated 
and  an  unjust  class-tax  based  upon  certain  assumed  earnings. 

Indirect  taxation  in  Massachusetts  was  of  less  impor- 
tance. Tonnage  duties  were  here  imposed,  as  in  nearly 
all  the  colonies.  Import  duties  were  levied  upon  luxu- 
ries and  in  particular  upon  wines  and  liquors ;  and  in 
the  excise  schedule  wines  and  spirits  were  the  principal 
articles  selected.  In  1737  an  excise  was  placed  upon 
coaches,  chariots,  chaises,  and  chairs ;  and  a  few  years 
later  for  a  brief  period  upon  tea,  coffee,  arrack,  snuff,  and 
earthenware. 

The  Southern  colonies  made  but  little  use  of  the  property 
tax,  but  relied  chiefly  upon  indirect  taxation,  supplemented  at 
times  by  the  poll  tax.  In  Virginia,  which  may  be  taken  as 
representative  of  the  Southern  group,  attempts  were  made  to 
tax  real  estate,  but  owing  to  the  opposition  of  the  planters  and 
land-owning  class,  its  development  was  slow.  Though  the 
poorer  classes  were  strenuous  in  opposing  the  poll  tax,  it 
continued  in  force,  but  was  gradually  reinforced  by  the  im- 
position of  customs  duties  upon  the  imported  liquors  and 
slaves  as  well  as  upon  the  exports  of  tobacco.  The  burden 
of  the  poll  tax  and  the  discrimination  thereby  shown  against 
the  landless  and  smaller  tenants  was  indeed  one  of  the  causes 
of  Bacon's  Rebellion  in  1676.  With  the  growth  of  negro 
slavery  in  the  eighteenth  century  the  poll  tax  also  became 
unpopular  with  the  wealthy  planters,  who  were  financially 
responsible  for  the  amounts  imposed  upon  their  slaves.  Still 
at  the  beginning  of  the  French  and  Indian  War  of  1756, 
which  created  heavy  burdens,  the  poll  tax  bore  the  charge  of 
the  campaign;  and  in  1763  it  alone  produced  more  than  all 
the  other  taxes  on  land,  tobacco,  and  slaves  imported,   to- 


§  5]  Taxation.  1 3 

gether  with  the  licenses,  fees,  and  carriage  duties.  With  the 
close  of  the  French  War  there  was  a  return  to  the  old  system 
of  indirect  taxation  as  far  as  was  practicable,  but  the  contest 
had  left  permanent  fiscal  results  in  the  establishment  of  special 
taxes,  as  those  on  coaches,  chariots,  and  fees  from  licensing 
and  in  suits  at  law. 

In  the  colony  of  New  York  a  more  mixed  system  of  taxa- 
tion prevailed.  While  the  early  settlers  were  under  Dutch 
rule  and  the  colony  was  known  as  New  Netherlands  it  was  to 
be  expected  that  Dutch  fiscal  methods  would  prevail.  In  her 
system  of  landed  estates  under  powerful  patroons  who  would 
oppose  any  direct  tax  upon  land  the  New  Netherlands  re- 
sembled Virginia ;  but  more  than  that,  New  Amsterdam,  the 
principal  city,  was  from  the  first  pre-eminently  a  trading 
centre.  In  Holland  indirect  taxes  were  laid  upon  the  impor- 
tant foreign  commerce  enjoyed  in  that  day  by  this  enterprising 
commonwealth,  and  excise  duties  were  levied  upon  wine,  beer, 
and  liquor.  These  two  forms  of  taxation,  being  the  principal 
sources  of  revenue  in  the  mother  country,  were  speedily  in- 
troduced by  the  colonial  commercial  company  into  the  New 
Netherlands,  and  were  also  in  harmony  with  the  economic  con- 
ditions of  the  settlement.  Goods  were  imported  from  Holland 
to  the  island  of  Manhattan  and  thence  distributed  along 
the  Hudson  and  throughout  the  interior.  As  New  Amster- 
dam lay  in  the  direct  line  of  commerce  between  New  England 
and  the  settlements  of  Virginia,  it  became  the  centre  of  an 
export  trade,  the  chief  articles  of  which  were  tobacco  and 
furs,  and  especially  beaver  skins. 

The  excise  taxation  of  the  Netherlands  also  found  a  fruitful 
application  in  this  colony,  as  there  were  numerous  distilleries, 
breweries,  and  wine-presses.  When  the  colony  was  transferred 
to  English  control  in  1664,  the  new  authorities,  according  to 
English  precedent,  made  a  beginning  in  the  development  of 
a  direct  property  tax,  and  after  the  establishment  of  the 
colonial  assembly  in  1683  permanently  incorporated  it  into 
the  revenue  system.  The  increasing  freedom  in  land  tenure 
and  the  agricultural  settlement  of  the  interior  made  the  pro- 


14  Colonial  Finance.  [§  6 

cess'  more  easy,  so  that  in  the  latter  part  of  the  eighteenth 
century  the  method  of  taxation  in  New  York  was  similar 
to  that  employed  in  New  England.  In  addition  to  the 
property  tax  New  York  also  continued  import  duties  and 
excises ;  and  the  quit  rents  of  the  settlers  which  were  still 
retained  furnished  a  small  supply  of  revenue  for  the  colonial 
treasury. 

6.    Tariffs  ;  Import  and  Export  Duties. 

In  the  rapid  summarization  of  the  sources  of  revenue  in 
Massachusetts,  Virginia,  and  New  York  mention  has  been 
made  of  import  and  export  duties.  In  view  of  the  part  which 
customs  revenue  has  played  in  the  American  fiscal  system 
developed  since  1789  some  further  description  should  be 
given  to  these  taxes.  The  colonies  had  a  long  experience 
with  trade  tariffs.  Nearly  every  assembly  levied  import  duties 
for  its  own  treasury  in  addition  to  those  imposed  by  England 
in  the  execution  of  the  navigation  laws.  The  objects  for 
which  these  duties  were  imposed  varied  as  they  do  now : 
sometimes  they  were  imposed  to  check  the  importation  of 
articles,  consumption  of  which  was  regarded  as  useless  or 
injurious ;  sometimes  as  retaliatory  weapons  against  rival  col- 
onies or  European  nations  other  than  England  ;  and  some- 
times for  protection  of  home  industries.  In  communities, 
however,  which  were  largely  self-sufficient  in  satisfying  their 
economic  wants,  which  constructed  their  own  furniture  and 
tools,  spun  and  wove  their  own  cloth,  and  limited  their  food 
to  the  products  of  their  own  farms,  the  volume  of  international 
exchange  could  not  be  large,  and  a  system  of  duties  on  im- 
ported goods  was  necessarily  restricted  in  its  scope. 

In  the  imposition  of  such  taxes  for  non-revenue  purposes 
there  was  no  consistent  or  permanent  policy  developed,  and 
generally  distinctly  protective  acts  were  short-lived.  An  ex- 
ample of  sumptuary  legislation  was  the  measure  enacted  in 
1638  in  Massachusetts  ordering  that  "whosoever  shall  buy  or 
receive  out  of  any  ship  any  fruit,  spice,  sugar,  wine,  strong 
water,  or  tobacco  shall  pay  to  the  treasurer  one-sixth  part  of 


§6]    Tariffs;   Import  and  Export  Duties.      15 

the  price  or  value  thereof;  and  every  person  who  shall  buy 
or  receive  any  of  the  said  commodities  with  intent  to  retail 
the  same  to  others  shall  pay  the  treasurer  one-third  part  of  the 
value  or  price  thereof."  Connecticut  levied  heavy  duties 
upon  the  export  of  lumber  in  order  to  husband  her  supply  of 
building  materials.  Maryland  enacted  discriminating  duties 
against  provisions  and  liquors  brought  in  from  Pennsylvania ; 
and  Virginia  in  return  retaliated  against  Maryland  by  imposing 
fees  upon  the  latter's  shipping.  For  protecting  home  indus- 
tries Massachusetts  at  one  time  imposed  double  rates  on  all 
commodities  brought  in  by  inhabitants  of  Rhode  Island,  Con- 
necticut, and  New  Hampshire.  There  was  an  impost  of  5  s. 
per  hogshead  on  all  molasses  and  60s.  per  hogshead  on  all 
rum  imported  into  Massachusetts  by  foreigners,  and  also  dis- 
crimination in  favor  of  Massachusetts  shipping.  Pennsylvania 
in  1 704  for  protective  purposes  taxed  the  importation  of  hops. 
Indeed,  tariff  duties  are  too  numerous  to  permit  specification ; 
apart  from  temporary  and  hastily  devised  acts,  Professor 
William  Hill  classifies  them  under  four  heads:  (1)  tonnage 
duties  or  taxes  on  shipping;  (2)  export  duties  on  tobacco; 
(3)  import  duties  on  slaves;  (4)  regular  tariff  schedules  in 
which  wines  and  liquors  were  the  most  important  items. 

Of  all  these  taxes  the  most  general  were  the  tonnage  duties, 
known  also  as  castle  duties  or  powder  duties,  the  latter  name 
arising  from  the  fact  that  the  ship's  owner  was  obliged  to  turn 
over  to  the  colonial  government  an  amount  of  powder  and 
shot  according  to  the  ship's  burden ;  later  these  payments 
were  commuted  into  cash.  Although  the  primary  purpose  of 
the  tonnage  duty  was  revenue,  to  be  specifically  applied  to 
national  defence,  its  maintenance  gave  considerable  protection 
to  local  shipping,  since  home  vessels  were  frequently  exempt 
from  payment. 

Duties  on  exports  were  common,  generally  levied  only  for 
revenue,  and  the  range  of  commodities  selected  was  wide. 
Virginia  placed  export  duties  on  tobacco,  skins,  furs,  wool,  and 
iron;     Connecticut,  upon  timber   and  staves;     New   Jersey, 


1 6  Colonial  Finance.  [§  6 

upon  staves  and  many  other  products  of  the  forests ;  Canada, 
upon  skins  and  furs ;  South  Carolina,  upon  leather,  furs,  skins, 
Indian  slaves,  and  timber ;  Maryland,  upon  tobacco  constantly, 
and  at  times  upon  furs,  skins,  beef,  pork,  bacon,  iron,  flour, 
wheat,  and  all  European  goods.  The  export  duty  on  tobacco 
was  naturally  found  only  in  the  Southern  colonies ;  in  Mary- 
land it  was  utilized  for  payments  to  the  proprietor  in  support 
of  the  government  and  for  colonial  needs  of  a  general  char- 
acter, while  in  Virginia  it  became  one  of  the  most  important 
and  regular  elements  of  the  revenue.  Here  the  duty  ranged 
from  2  to  10  shillings  a  hogshead  of  500  lbs.  The  import 
tax  on  slaves  also  found  its  principal  operation  in  the  Southern 
colonies.  Although  the  tax  was  levied  in  Pennsylvania,  New 
York,  and  Massachusetts,  and  possibly  other  colonies,  its  pro- 
ceeds were  small,  not  only  because  few  slaves  were  imported, 
but  because  the  rates  were  low. 

In  the  development  of  a  general  tariff  schedule  South  Car- 
olina went  the  farthest ;  a  large  number  of  articles  were  taxed 
and  rates  were  higher  than  elsewhere.  In  1703  a  general 
tariff  was  enacted  in  which  specific  duties  were  placed  upon 
liquors,  provisions,  and  slaves,  and  an  ad  valorem  rate  of  3 
per  cent,  upon  all  other  commodities.  During  succeeding 
years  until  1740  ad  valorem  duties  were  low,  varying  from 
1  to  5  per  cent.,  while  the  list  of  specific  duties  was  con- 
tinually enlarged  until  the  end  of  the  colonial  period.  In 
Massachusetts  the  tariff  schedule  was  briefer  and  the  rates  im- 
posed were  still  more  insignificant ;  nevertheless  tariff  legisla- 
tion was  systematic,  and  the  tariff  law  was  regularly  renewed 
from  1692  until  1774,  —  English  goods,  however,  were  not 
subject  to  duties  after  17 19.  Specific  duties  were  imposed 
on  wine,  rum,  tobacco,  sugar,  molasses,  and  dye  goods,  and 
ad  valorem  duties  on  all  other  commodities  at  a  rate  at  first  of 
id.  on  20s.  worth  in  1692,  increased  to  2d.  in  1731,  to  4d.  in 
1739,  and  continued  at  that  rate  until  1774.  In  New  York 
the  heavy  duties  imposed  during  Dutch  rule  and  at  the  com- 
mand of  the  Duke  of  York  "  had  an  influence  in  accustoming 


§7]  Control  of  Appropriations.  17 

the  colonists  to  tariff  taxes,  so  that  when  they  were  allowed  an 
assembly  and  permitted  to  make  their  own  laws  for  raising 
revenue  they  collected  most  of  it  by  duties  on  imports  and 
exports."  In  the  other  colonies  the  import  duties  were  hardly 
important  enough  to  justify  the  name  of  tariff  systems,  and  in 
some  none  can  be  found.  Connecticut,  Pennsylvania,  Mary- 
land, and  North  Carolina  taxed  only  a  few  articles  besides 
liquors,  while  Maryland  imposed  duties  only  for  temporary 
purposes  or  for  special  objects  rather  than  as  a  source  of 
constant  revenue. 

From  this  confused  mass  of  colonial  tariff  legislation  a  few 
points  of  permanent  interest  may  be  extracted.  In  the  early 
tariffs  specific  duties  were  the  exception,  and  low  ad  valorem 
duties  varying  from  1  to  5  per  cent,  were  the  general 
rule ;  but  in  the  course  of  time  there  was  a  change  toward 
specific  duties,  both  to  avoid  fraud  and  to  secure  a  more  defi- 
nite tax.  The  tariffs  were  enacted  but  for  short  periods,  and 
in  the  bills  of  levy  it  was  common  to  specify  the  object  for 
which  the  revenue  would  be  applied.  As  to  whether  duties 
were  actually  collected  according  to  the  laws  enacted,  Pro- 
fessor Hill  is  of  the  opinion  that  there  was  gross  evasion,  first 
because  the  open  disregard  of  the  English  navigation  laws 
must  have  had  demoralizing  results  as  to  obedience  of  local 
law ;  and,  secondly,  because  the  returns  of  revenue  from  this 
source  were  so  small,  —  in  New  York,  for  instance,  the  impost 
did  not  produce  more  than  one-fifth  of  what  was  due. 

7.     Control  of  Appropriations. 

Although  the  expenditures  of  the  several  colonies  as  a  rule 
were  not  large,  the  provincial  assemblies  early  showed  a  dis- 
position, like  the  English  House  of  Commons,  to  keep  as  firm 
a  grasp  as  possible  over  appropriations,  and  their  insistence 
led  to  continued  contests  with  the  governors.  It  was  the 
wish  of  the  Crown  that  the  governors  be  granted  permanent 
support,  but  the  colonists  almost  invariably  insisted  upon  limit- 
ing supplies  for  salary  to  one  year,  partly  to  prevent  encroach- 

2 


1 8  Colonial  Finance.  [§  8 

ment  upon  their  liberties,  partly  to  prevent  misapplication  of 
funds,  and  largely  in  order  to  preserve  a  useful  weapon  in 
controversies  with  the  governor.  The  home  government  also 
intended  that  after  supplies  had  been  voted  the  signature 
of  the  governor  alone  should  be  necessary  for  warrants  drawn 
on  the  public  treasury,  opportunity  being  given  to  the  assembly 
only  to  inspect  the  accounts.  Here  again  the  colonists  ex- 
tended their  claims ;  and  some  of  the  assemblies  after  pass- 
ing bills  involving  appropriations  determined  that  no  payments 
should  be  made  except  upon  a  distinct  vote  of  the  legislature. 
They  wished  not  only  to  vote  supplies  but  to  control  disburse- 
ments and  to  audit  the  accounts.  A  few  of  the  colonies  went 
so  far  as  to  elect  their  own  treasurers,  entirely  independent 
of  the  control  of  the  governors,  and  thus  they  thrust  the 
executive  into  the  background  in  the  management  of  the 
finances.  So  great  was  the  dislike  of  executive  control  in 
matters  involving  taxation  and  expenditure  that  it  was  not 
uncommon,  when  special  appropriations  were  made  for  ex- 
traordinary expenditures,  to  appoint  special  commissioners  to 
supervise  these  particular  accounts,  in  order  that  executive 
influence  might  be  reduced  to  a  minimum.  This  jealous  fear 
of  the  provincial  governor  later  had  its  fruit  in  the  effort  of 
the  Continental  Congress  to  manage  the  finances  through 
committees  and  boards  instead  of  intrusting  them  to  a  single 
head.  Gerry  of  Massachusetts  in  his  opposition  to  the  estab- 
lishment of  a  department  of  the  treasury  under  a  single 
secretary  was  simply  maintaining  the  principle  which  had 
previously  been  so  tenaciously  upheld  in  his  colony,  that  the 
treasurer  should  at  all  times  be  accountable  to  the  assembly. 

8.    Money  and  Coinage. 

The  early  colonists  were  poor  and  brought  little  ready 
money  with  them  from  Europe,  nor  did  they  have  credit 
abroad.  As  no  silver  or  gold  mines  were  worked  in  the  set- 
tlements, the  only  source  of  supply  of  the  precious  metals  was 
through  trade  and  shipping  j  that  is,  by  exporting  commodities 


§  8]  Money  and  Coinage.  1 9 

to  a  greater  value  than  were  imported,  or  by  acting  as  carriers 
for  English  commerce.  The  colonists  were,  however,  in  con- 
stant want  of  manufactured  commodities  and  articles  of  luxury 
which  could  be  obtained  only  on  the  continent,  and  conser 
quently,  even  if  the  balance  of  trade  in  staples  with  England  or 
the  West  Indies  was  favorable,  the  final  settlement  of  indebted- 
ness to  America  was  more  likely  to  be  made  in  merchandise 
than  in  silver.  The  consequence  was  that  the  quick  amount 
of  a  standard  money  medium  did  not  keep  pace  with  expand- 
ing industry  and  internal  commerce.  To  meet  the  current 
need  of  instruments  of  commercial  exchange,  the  colonists 
repeated  most  of  the  monetary  experiments  which  had  been 
previously  made  in  other  communities  and  tried  some  novelties 
of  their  own.  The  situation  became  the  more  complicated 
since  the  colonies  were  not  forced  by  any  controlling  head 
to  adopt  uniform  monetary  legislation.  Barter  was  resorted 
to  in  the  earlier  stages  of  settlement ;  then  certain  staple  com- 
modities were  declared  by  law  to  be  legal  tender  in  payment 
of  debts.  Curious  substitutes  were  employed,  such  as  shells 
or  wampum.  Corn,  cattle,  peltry,  furs  were  monetary  media 
in  New  England ;  tobacco  and  rice  in  the  South.  The  term 
bills  of  students  at  Harvard  College  were  for  many  years  met 
by  the  payment  of  produce,  live  stock,  meat,  and  "  occasionally 
with  various  articles  raked  up  from  the  family  closets  of  student 
debtors."  One  student,  later  president  of  the  college,  in  1649 
settled  his  bill  with  "  an  old  cow,"  and  the  accounts  of  the 
construction  of  the  first  college  building  include  the  entry, 
"  Received  a  goat  30s.  plantation  of  Watertown  rate,  which 
died." 

Taxes  were  paid  in  commodities  at  rates  of  valuation  con- 
siderably higher  than  the  market,  and  storehouses  in  some 
colonies  were  maintained  in  which  public  property  was  de- 
posited by  tax-gatherers.  As  commodities  acceptable  for 
money  payment  were  valued  at  rates  above  the  market  price, 
a  discrimination  was  shown  against  silver,  which  tended  to 
keep  specie  out  of  circulation.     In  the  endeavor  to  retain  the 


20  Colonial  Finance.  [§  8 

small  supply  of  silver  which  came  in  through  trade,  the  colo- 
nists frequently  made  another  error  in  declaring  current  silver 
to  be  of  legal  value  higher  than  the  mint  value  as  determined 
at  the  place  of  coinage.  The  course  of  trade  was  such  that 
Spanish  and  Portuguese  rather  than  English  coins  became  the 
most  common,  and  the  coin  principally  in  use  was  the  Spanish 
silver  dollar  or  piece  of  eight  reals ;  but  as  if  to  increase  the 
disorder,  the  colonists  retained  the  English  system  of  pounds, 
shillings,  and  pence,  as  their  money  of  account.  An  accu- 
rate mathematical  valuation  made  the  "piece  of  eight"  equal 
to  4s.  6d.  of  English  money.  If  that  ratio  had  been  pre- 
served there  would  have  been  no  interference  with  the  free 
circulation  of  the  coin  according  to  the  natural  flow  of  trade. 
At  first,  for  purposes  of  convenience  the  customary  rate  at 
which  the  piece  of  eight  circulated  was  made  five  shillings  (an 
overvaluation  of  11  per  cent.),  but  in  1652,  when  a  mint  was 
established  in  Massachusetts,  shillings  and  smaller  coins  were 
minted  at  a  rate  a  little  less  than  six  shillings  to  a  heavy  piece 
of  eight.  In  Virginia  it  was  resolved  to  raise  the  value  of  the 
Spanish  coin  to  six  shillings,  in  the  hope  that  specie  might 
be  attracted  by  favorable  estimation.  New  York  went  still 
farther  and  in  1676  increased  the  valuation  to  six  shillings 
and  ninepence,  and  later  in  some  of  the  colonies  the  valua- 
tion was  placed  as  high  as  eight  shillings,  and  in  one  or  two 
instances  even  higher. 

The  valuation  of  money  was  thus  differently  regulated  by 
statute  in  different  colonies,  and  the  confusion  was  the  greater 
because  of  the  circulation  of  light  coins  which  drove  out  the 
heavy  coins  or  good  money.  The  colonists  were  not  alone 
in  their  foolish  attempts  to  legislate  a  valuation  of  coin  other 
than  as  value  by  weight ;  they  were  simply  imitating  what  had 
been  previously  tried  in  Europe.  In  spite  of  all  these  legis- 
lative efforts  to  attract  specie  it  disappeared  ;  in  vain  were 
laws  passed  in  some  colonies  against  the  exportation  of 
coin  ;  in  vain  were  Massachusetts  searchers  given  extraordi- 
nary powers  to  examine  outgoing  vessels.     In  1 704  the  English 


9]  Bills  of  Credit. 


21 


Crown  endeavored  to  rectify  the  evil  by  a  general  regulation 

of  the  value  of  Spanish  money,  and  fixed  the  maximum  rating 

of  a  piece  of  eight  at  six  shillings  currency.     This  gave  rise 

to  the  term  "  proclamation  "  money,  and  rated  silver  coins  at 

a  third  above  their  sterling   value.     Again  a  few  years  later 

Parliament  attempted  to  clinch  this  proclamation  by  making 

it  a  felony  to  pay  or  receive  the  coins  at  above  the  specified 

rates.     The  spirit  of  this  legislation  was  then  defeated  by  the 

colonists,  who  passed  laws  fixing  the  price  of  silver  at  so  much 

per  ounce  without  reference   to  the   proclamation,  and  who 

also  turned  to  paper  issues  and  banking  schemes  with  greater 

readiness. 

Massachusetts  was  the  only  colony  which  ever  established 

a  mint ;  placed  under  the  operation  and  management  of  John 

Hull,  its   operations   were   confined    to    minting   small    silver 

pieces,    familiarly    known    as    pine-tree    shillings.      Vigorous 

attempts  were  made  to  force  the  managers  to  pay  a  portion 

of  the  profits  to  the  government,  but  with  little  success,  and 

in    1684    the    mint    was   closed    by   order   of    the    Crown. 

Attempts  to  establish   mints  in  Virginia  and   Maryland  were 

unsuccessful. 

9.    Bills  of  Credit. 

Since  there  was  a  scarcity  of  circulating  medium,  caused  by 
the  constant  drain  of  specie  for  export,  it  is  not  strange  that 
projects  for  converting  credit  into  wealth  should  have  sprung 
up  in  the  colonies,  especially  when  we  remember  that  in  the 
mother  country  the  same  period  witnessed  numerous  like 
schemes,  some  of  them  of  large  proportions.  Several  plans 
were  devised  during  the  seventeenth  century  for  the  establish- 
ment of  banks  or  funds  for  the  issue  of  currency,  based  upon 
the  deposit  or  pledge  of  securities.  The  first  important  issues 
of  paper  money  were,  however,  due  to  a  somewhat  different 
reason,  —  the  fiscal  requirements  of  an  exhausted  treasury. 
The  experience  of  Massachusetts  will  serve  as  a  useful  illus- 
tration :  In  1690  this  commonwealth  made  an  issue  of  ^7000 
of  bills  of  credit,  soon  increased  to  ,£40,000,  in  order  to  pay 


22  Colonial  Finance.  [§  9 

the  soldiers  who  engaged  in  the  expedition  against  Port  Royal 
and  Quebec  in  the  French  War.  This  was  an  unexpected 
measure,  for  it  had  been  anticipated  that  the  cost  of  the  attack 
would  be  met  from  the  proceeds  of  the  victory.  The  govern- 
ment of  the  colonies  was  passing  through  a  crisis  ;  its  very 
legality  was  questioned,  and  it  was  utterly  impracticable  to 
raise  in  a  few  days  as  large  a  sum  of  money  as  would  be 
necessary.     This  issue  is  thus  described  by  Cotton  Mather  : 

"  The  General  Assembly  first  passed  an  Act,  for  the  levying 
of  such  a  sum  of  Money  as  was  wanted  .  .  .  and  this  Act  was 
a  Fund,  on  which  the  Credit  of  such  a  Sum,  should  be 
rendered  passable  among  the  people.  Hereupon,  there  was 
appointed  an  Able  and  Faithful  Committee  of  Gentlemen,  who 
printed  from  Copper  Plates,  a  just  Number  of  Bills,  and 
Flourished,  Indented,  and  Contrived  them,  in  such  a  manner 
as  to  make  it  Impossible  to  Counterfeit  any  of  them,  without 
a  speedy  Discovery  of  the  Counterfeit ;  besides  which,  they 
were  all  Signed  by  the  Hands  of  three  belonging  to  that 
Committee."  .  .  .  "The  public  Debts  to  the  Sailors  and 
Souldiers,  now  upon  the  point  of  Mutiny  (for,  Anna  Tenenti, 
Omnia  dat,  qui  Justa  negat!)  were  in  these  Bills  paid 
immediately." 

The  text  of  one  of  these  Massachusetts  notes  was  as 
follows :  — 

"This  indented  bill  of  ten  shillings,  due  from  the  Massa- 
chusetts Colony  to  the  Possessor,  shall  be  in  value  equal  to 
money,  and  shall  be  accordingly  accepted  by  the  Treasurer, 
and  Receivers  subordinate  to  him  in  all  publick  payments,  and 
for  any  stock  at  any  time  in  the  Treasury.  Boston  in  New 
England  December  the  ioth,  1690.  By  order  of  the  General 
Court." 

These  early  emissions  being  payable  in  one  year  were 
practically  due  or  exchequer  bills  in  anticipation  of  taxes,  and 
for  some  years  were  redeemed,  though  as  promptly  replaced 
by  further  anticipations.  At  first  they  depreciated,  but  they 
circulated  at   par  for  a    time    while  the   issues  were  limited 


§^9]  Bills  of  Credit.  23 

in  quantity  and  were  indirectly  declared  to  be  legal  tender, 
by  giving  them  a  premium  of  5  per  cent,  over  silver 
in  the  payment  of  taxes.  The  issues  were  enlarged  and  in 
1704  the  time  of  redemption  was  extended  to  two  years,  in 
1709  to  four  years,  in  1710  to  five  years,  in  1711  to  six  years, 
and  later  to  thirteen  years.  Delay  became  a  habit  and  the 
continuance  of  these  forced  loans  gradually  weakened  the 
willingness  of  the  people  to  submit  to  taxation  even  for  cur- 
rent expenditures,  or  to  apportion  with  prudence  taxes  accord- 
ing to  expenditures.  Depreciation  now  set  in  and  together 
with  the  introduction  of  bills  of  neighboring  colonies  drove 
silver  out  of  circulation.  The  question  of  the  issue  of 
paper  currencies  finally  developed  a  running  dispute  between 
the  provincial  legislature  and  the  royal  governors,  who  insisted 
upon  adequate  taxation  to  cancel  these  credit  obligations. 

In  1 71 1  Massachusetts  introduced  a  variation  from  the 
issue  of  bills  based  upon  public  credit  and  secured  on  the 
pledge  of  taxes,  by  an  issue  in  the  form  of  bills  to  certain 
Boston  merchants,  to  enable  them  to  secure  supplies  for  a 
public  undertaking.  This  method  was  repeated  in  17 14  on 
a  more  open  and  general  scale,  when  ^50,000  in  public 
bills  were  issued  and  loaned  on  real  estate  security  for  five 
years  at  5  per  cent,  interest,  one-fifth  to  be  paid  back  each 
year ;  and  opportunity  was  given  for  a  general  subscription  by 
the  public.  Under  this  scheme  no  provision  had  to  be  made 
for  redemption  by  laying  taxes,  and  another  advantage  was 
found  in  the  interest  which  the  public  treasury  would  receive 
without  any  real  outlay  of  capital.  Similar  issues  of  loan-bills 
took  place  in  17 16,  1721,  and  1728,  making  the  total  amount 
^260,000  ;  these  circulated  side  by  side  with  the  ordinary 
bills  of  credit. 

In  the  issue  of  paper  currency  Massachusetts  was  quickly 
followed  by  New  Hampshire,  Rhode  Island,  Connecticut, 
New  York,  and  New  Jersey, — all  these  previous  to  1711. 
South  Carolina  fell  into  line  in  17 12,  Pennsylvania  in  1723, 
Maryland  in   1734,  Delaware  in   1 739,  Virginia  in   1755,  and 


24  Colonial  Finance.  [§  10 

Georgia  in  i  760.  Space  cannot  be  given  to  the  history  of  all 
these  issues ;  they  were  monotonously  alike  in  character,  in 
origin,  and  in  results.  Ingenuity  in  devising  variations  of  the 
main  principle  appears  to  have  been  exhausted.  There  were 
interest-bearing  notes,  some  of  which  were  legal  tender,  while 
others  were  not ;  there  were  non-interest-bearing  notes,  some 
of  which  were  legal  tender  for  future  obligations  but  not  for 
past  debts ;  some  were  legal  tender  for  all  purposes,  and 
others  not  legal  tender  between  private  persons,  but  receivable 
for  all  public  payments.  In  some  instances  funds  arising  from 
certain  sources  of  taxation  were  pledged  for  the  redemption 
of  the  notes,  in  others  not.  In  some  cases  they  were  payable 
on  demand ;  in  others,  at  some  future  time.  Sometimes  they 
were  issued  by  committees,  and  sometimes  by  a  specially 
designated  official. 

10.     Loan  Banks. 

Reference  has  been  made  to  the  loan  bills  of  Massachusetts 
as  distinguished  from  bills  of  credit.  A  third  form  of  paper 
money  is  the  issue  of  the  so-called  "  loan  banks."  Banking 
institutions  of  that  period  were  exceedingly  crude  measured 
by  the  experience  of  modern  private  finance  :  even  the  mother 
country  two  hundred  years  ago  had  had  but  little  experience 
in  this  field.  A  colonial  bank  was  not  at  all  like  that  of 
modern  days,  —  a  convenient  institution  for  receiving  deposits, 
making  discounts,  and  negotiating  drafts,  —  it  was,  as  Francis 
A.  Walker  tersely  defined  it,  "  simply  a  batch  of  paper  money," 
whether  organized  by  private  individuals  or  by  public  author- 
ity ;  the  issuers  never  had  permanent  places  of  business,  or 
special  resources  or  corporate  existence ;  indeed  they  rarely 
had  any  property  to  pledge  as  a  basis  of  credit. 

In  Massachusetts,  private  banks  to  loan  bills  upon  real 
estate,  personal  security,  and  merchandise  were  organized  in 
the  seventeenth  century,  but  of  their  history  little  is  known  : 
they  were  certainly  short-lived,  and  it  is  probable  that  the 
issue  of  government  notes  in  1690  checked  the  development 


§  io]  Loan  Banks.  25 

of  institutions  of  this  character.  In  17 14  when  a  proposition 
was  made  "  for  a  partnership  to  emit  bills  on  security,  to  be 
supplemented  by  obtaining  the  signatures  of  citizens  to  an 
agreement  to  receive  such  bills  in  trade,"  opposition  was 
shown  to  granting  to  a  private  company  such  valuable  privi- 
leges and  opportunities  for  profit,  and  consequently  there 
was  substituted  a  rival  scheme  for  the  establishment  of  a  public 
bank  which  should  emit  bills  on  real-estate  security.  As 
always  in  such  cases,  some  inadequate  security  was  taken, 
and  the  finances  of  the  colonial  government  suffered  additional 
embarrassment.  In  1733  the  project  for  a  private  bank  again 
engaged  public  attention,  inspired  in  part  by  the  excessive 
circulation  of  Rhode  Island  bills  within  Massachusetts ;  and 
a  company  of  merchants  issued  ^110,000  of  notes  redeem- 
able in  ten  years  in  silver  at  19  shillings  per  ounce,  the 
security  of  the  notes  depending  solely  upon  the  solvency  of 
the  merchants.  Inasmuch  as  silver  rose  rapidly  in  value  after 
this  issue,  on  account  of  further  large  colonial  emissions  of 
paper  currency,  the  merchant  notes  went  to  a  premium  when 
compared  with  loan  bills,  and  were  soon  hoarded. 

The  most  notable  private  banking  scheme  in  Massachusetts 
was  projected  in  1 740  ;  since  a  circulating  medium  was  scarce, 
it  was  proposed  to  set  up  a  bank  on  land  security  ;  and  sub- 
scriptions were  invited  to  a  capital  stock  of  ^150,000,  that  is, 
people  were  requested  to  apply  for  loans  in  certain  amounts 
in  bills  of  the  bank ;  the  only  cash  payment  required  was 
40  shillings  in  each  ^1000  subscribed,  for  the  purposes  of 
organization.  "  Each  subscriber  was  to  furnish  satisfactory 
mortgage  security  for  his  loan,  on  which  he  was  to  pay  inter- 
est at  the  rate  of  3  per  cent,  per  annum,  and  the  principal 
was  to  be  paid  in  twenty  annual  instalments  of  5  per  cent, 
each.  These  payments  were  to  be  made  in  '  manufactory 
notes,'  as  the  notes  of  the  company  were  called,  or  in  hemp, 
flax,  cordage,  bar-iron,  cast-iron,  and  certain  other  enumerated 
commodities."  There  was  no  agreement  to  redeem  the  notes, 
nor  was  there   any  real   capital.     As  Mr.   Davis,  the  learned 


26  Colonial  Finance.  [§  .10 

historian  of  this  institution,  observes,  "It  is  obvious  that  it 
was  possible  for  the  mortgage  loans  of  the  Land  Bank  to 
be  paid  off  entirely  in  commodities,  thus  leaving  the  notes 
afloat  without  other  security  than  was  afforded  by  the  partner- 
ship." The  career  of  this  bank,  as  well  as  that  of  its  rival,  the 
Silver  Bank,  was  summarily  cut  short  in  174 1  by  the  application 
of  the  parliamentary  "  Bubble  "  Act,  originally  enacted  in  1720 
at  the  time  of  that  financial  craze  in  England  which  was 
promoted  by  the  extravagant  schemes  of  John  Law.  By  far 
the  larger  part  of  these  bills  were  redeemed,  but,  owing  to  the 
insolvency  and  dishonesty  of  some  of  the  holders,  the  accounts 
were  never  satisfactorily  settled.  For  more  than  twenty-five 
years  there  was  litigation,  legislation,  and  meetings  of  com- 
mittees devoted  to  the  consideration  of  this  troublesome  affair. 
In  Pennsylvania  a  public  loan  bank  was  managed  with 
success  and  won  the  praise  of  English  officials,  who  in  general 
were  not  partial  to  issues  of  paper  money.  In  1722  the 
colony  of  Pennsylvania  became  industrially  depressed  because 
of  previous  unwise  enterprises,  and,  in  the  words  of  Keith, 
"  labored  under  great  discouragement  for  want  of  a  cur- 
rency ;  "  many  were  leaving  Philadelphia  ;  "  the  shop-keepers 
had  no  money  to  go  to  market,  and  the  farmer's  or  planter's 
crop  was  then  reduced  to  the  lowest  value ;  so  that  all  the 
European  goods  imported,  as  well  as  the  bread  and  flour 
or  country  produce,  were  bought  up  and  engrossed  at  a  low 
price,  by  a  cabal  of  only  four  or  five  rich  men,  who  retailed 
them  again  on  credit  at  what  rate  they  pleased,  taking  advan- 
tage of  the  people's  necessities  and  circumstances ;  by  which 
means  they  soon  got  the  whole  country  into  their  debt,  exact- 
ing bonds  of  everybody  at  8  per  cent.,  which  was  then 
the  legal  interest.  This  made  such  an  universal  clamor 
all  over  the  province,  that  when  the  assembly  met  the  latter  end 
of  the  same  year,  they  hastened  to  prepare  a  bill  for  establish- 
ing a  paper  currency  ;  but  instead  of  following  the  same  method 
which  had  been  hitherto  used  in  the  neighboring  colonies,  by 
taxing  the  people  in  order  to  raise  an  annual  fund  for  sinking 


§  10]  Loan  Banks.  27 

the  paper,  they  invented  a  much  more  commodious  and 
expedient  way."  They  established  a  loan-office  governed  by 
four  commissioners,  who  were  empowered  to  issue  and  loan 
bills  of  very  small  denominations,  the  largest  not  exceeding 
20  shillings;  the  security  was  to  be  land  of  double  the  value 
lent,  together  with  a  bond  and  judgment  on  the  borrower's 
whole  estate,  with  the  condition  that  one-twelfth  of  the  sum 
should  be  annually  paid  back  with  interest  at  5  per  cent. 
Not  less  than  ^20  nor  more  than  ^200  could  be  loaned  to  any 
one  person,  and  the  accounts  were  to  be  inspected  by  a 
committee  of  the  assembly  once  in  every  six  weeks. 

"  It  is  inconceivable  to  think  what  a  prodigious  good  effect 
immediately  ensued  on  all  the  affairs  of  that  province  ;  the 
shipping  from  the  west  of  England,  Scotland,  and  Ireland, 
which  just  before  used  to  be  detained  five,  six,  and  some- 
times nine  months  in  the  country  before  they  could  get  in  the 
debts  due  to  them  and  load,  were  now  despatched  in  a  month 
or  six  weeks  at  farthest.  The  poor  middling  people  who  had 
any  lands  or  houses  to  pledge,  borrowed  from  the  loan-office, 
and  paid  off  their  usurious  creditors.  The  few  rich  men  who 
had  before  this  given  over  all  trade,  except  that  of  usury  — 
were  obliged  to  build  ships,  and  launch  out  again  into  trade." 
In  1739  a  similar  fund  was  issued  for  sixteen  years,  and  was 
equally  well  managed,  receiving  the  commendation  of  Thomas 
Pownal.  The  reasons  for  the  greater  success  of  Pennsylvania 
was  perhaps  due  to  the  wiser  provisions  for  redemption,  —  in 
Massachusetts,  for  example,  the  period  was  either  too  short, 
as  five  years  from  17 14;  or  too  long,  with  not  so  general  a 
demand  for  payments  by  instalments  ;  hence  it  was  easy  for 
borrowers  to  put  off  the  day  of  settling  their  obligations,  until 
they  were  financially  involved.  In  Pennsylvania  all  the  bills 
were  issues  against  instalment  mortgages  running  for  sixteen 
years,  and  this  colony  was  also  careful  not  to  issue  excessive 
amounts,  and  imposed  more  adequate  taxes  for  the  support  of 
the  government. 


28  Colonial  Finance.  [§  H 

11.    English  Legislation  against  Paper  Currency. 

The  issue  of  paper  money  did  not  go  unopposed.  The  de- 
preciation was  so  great  that  every  department  of  business  and 
industry  was  affected, — in  1740  sterling  exchange  in  Massa- 
chusetts was  quoted  at  550.  The  significance  of  this  is  clear 
when  it  is  understood  that  at  the  rating  of  six  New  England 
shillings  to  the  Spanish  or  Mexican  dollar,  1333/3  shillings  law- 
ful money  were  equivalent  to  100  shillings  ;  sterling  exchange 
at  550  meant  therefore  a  depreciation  of  paper  currency  of 
about  three-fourths;  and  in  1750,  when  exchange  was  1100, 
a  depreciation  of  nearly  nine-tenths. 

In  Rhode  Island  the  earlier  bills  were  finally  worth  but  little 
more  than  4  per  cent,  of  their  face  value.  In  New  York  and 
Pennsylvania  results  were  not  so  serious,  but  in  the  Caro- 
linas  depreciation  took  away  nine-tenths  of  the  value  of  the 
bills.  As  the  colonies  made  their  issues  independently  of 
each  other,  there  was  much  jealousy  in  regard  to  the  circula- 
tion of  bills  of  a  neighboring  government,  and  many  colonial 
laws  were  enacted  to  prevent  it.  Under  the  familiar  principle 
of  Gresham's  law,  the  poorly  regulated  bills  of  Rhode  Island 
tended  to  displace  the  better  protected  bills  of  Massachusetts, 
even  in  Massachusetts. 

Serious  complications  also  arose  because  of  the  circulation 
of  various  issues  of  a  colony  at  the  same  time.  Old  issues 
were  abandoned  in  apparent  despair  of  redemption  and  taken 
up  at  various  discounts  by  new  issues.  Mr.  Davis  relates  that 
in  January,  1 736—1 737,  the  Massachusetts  council  approached 
the  subject  in  a  very  serious  mood  and  voted  that  "  whereas 
his  majesty's  good  subjects  have  for  many  years  been  great 
sufferers  by  the  uncertain  and  sinking  state  of  the  bills  of  pub- 
lic credit,  which  difficulty  doubtless  more  particularly  moved 
this  court  in  a  very  solemn  manner  to  implore  divine  guidance 
and  blessing  in  the  present  sessions :  wherefore  to  comply 
with  this  obligation  and  profession,  it  seems  necessary  that 
this  court  shall  do  all  that  is  possible  to  remedy  this  threaten- 
ing mischief."     The  remedy  adopted  was  the  emission  of  bills 


§  u]  English  Legislation.  29 


of  credit  in  a  new  form  of  value  1  to  3  of  the  old  issue.  Thus 
bills  were  known  as  old  tenor  and  new  tenor  ;  and  as  the  same 
downward  remedy  was  easy,  in  Massachusetts  we  find  various 
other  substitute  issues,  as  middle  tenor,  new  tenor  firsts,  and 
new  tenor  seconds. 

As  a  rule  the  issues  of  the  colonies  south  of  New  England, 
with  the  exception  of  the  Carolinas,  were  made  in  greater 
moderation,  and  the  conditions  of  redemption  were  more 
carefully  observed.  Virginia  did  not  emit  bills  until  after  the 
middle  of  the  eighteenth  century.  The  evil  of  depreciation 
was  greatest  in  the  New  England  colonies,  partly  because, 
being  introduced  there  first,  the  bills  had  a  longer  career,  and 
partly  because  of  the  more  frequent  establishment  of  loan 
banks  of  issue,  private  and  public,  which  helped  to  confuse 
and  demoralize  public  opinion  in  regard  to  the  proper  func- 
tions and  limitations  of  paper  currency.  In  Massachusetts, 
between  1702  and  1750  inclusive,  ^4,634,700  bills  were 
issued,  of  which  ,£2,814,900  were  retired,  leaving  outstand- 
ing ,£1,819,800.  The  years  1732,  1739,  and  1749  were 
the  only  years  during  the  whole  period  in  which  no  emis- 
sions were  made.  The  English  government  showed  its  dis- 
approbation of  the  reckless  monetary  issues  by  suppressing 
the  Land  Rank  in  Massachusetts  in  1741  ;  and  finally  in 
1 75 1  Parliament  exercised  its  prerogative,  and  enacted  a 
law  forbidding  any  further  issue  of  legal-tender  bills  of  credit 
by  the  New  England  colonies,  and  in  1764  this  earlier  pro- 
hibition was  extended  to  all  the  other  colonies.  The  re- 
striction, however,  did  not  apply  to  treasury  notes  not  legal 
tender,  which  were  issued  for  very  brief  periods  in  anticipation 
of  taxes.  During  this  period  some  of  the  colonies  endeavored 
to  redeem  their  notes.  Massachusetts,  out  of  the  funds  voted 
by  Parliament  as  payment  for  expenditures  in  King  George's 
War,  retired  her  currency  at  the  rate  of  7^  to  1  ;  and  Con- 
necticut a  little  later  at  8%  to  1. 

The  interference  of  the  home  government  in  prohibiting 
paper  issues  had  more  than  immediate  results.     It  provoked 


30  Colonial  Finance.  [§  12 

colonial  opposition,  was  regarded  as  an  unjustifiable  inter- 
ference with  local  liberties,  and  helped  to  develop  the  grow- 
ing discontent  with  government  by  England.  At  the  time  the 
Land  Bank  of  Massachusetts  was  suppressed  a  contemporary 
writer  wrote  that  the  temper  of  the  people  was  irritated  and 
inflamed  to  such  a  degree  that  they  seemed  ripe  for  tumult 
and  disorder;  two-thirds  of  the  House  of  Representatives 
were  bitter  partisans  or  abettors  of  the  Land  Bank  scheme ; 
and  while  many  in  the  colony  recognized  the  possible  evils  of 
the  project,  the  arbitrary  extension  of  the  Bubble  Act,  origi- 
nally designed  for  England  and  Ireland,  excited  so  general  a 
feeling  of  hostility  to  English  interference  that  any  good  from 
efforts  in  the  way  of  educating  the  people  to  sounder  ideas  was 
largely  lost.  Franklin  in  1766  told  England  that  one  of  the 
reasons  for  the  ill-feeling  in  America  toward  her  authority 
was  the  prohibition  of  paper  money.  The  restrictive  act  of 
England  did  not  entirely  suppress  colonial  paper  money; 
under  the  exceptions  prescribed,  temporary  treasury  notes  as 
well  as  the  notes  of  loan  banks  which  had  not  been  sup- 
pressed continued  to  circulate;  so  that  in  1774  it  was  esti- 
mated that  $12,000,000  were  in  current  use.  Hence  in  the 
crisis  of  the  Revolution  the  colonists  could  hardly  be  expected 
to  turn  away  from  paper  currency. 

The  story  of  the  colonial  issues  belongs  perhaps  more  prop- 
erly to  the  history  of  commerce  or  of  money  than  to  financial 
history,  but  this  protracted  and  disturbing  experience  had 
much  to  do  with  creating  in  later  times  erroneous  opinions 
concerning  public  finance.  Accustomed  to  rely  largely  upon 
bills  of  credit,  the  colonists  in  some  sections  were  averse  to 
taxation,  and  the  explanation  of  the  disastrous  financiering  of 
the  Revolutionary  War  is  to  be  found  in  a  study  of  the  financial 
experiences  and  monetary  abuses  extending  over  all  the  settle- 
ments from  the  beginning  of  the  eighteenth  century. 

12.    Taxation  by  England. 

Until  1765  England  attempted  to  collect  but  little  revenue 
from  the  colonies  for  her  own  imperial  purposes,  and  that  little 


§  12]  Taxation  by  England.  31 

had  been  secured  through  tonnage  taxes,  customs,  and  port 
dues,  which  had  for  their  chief  object  the  regulation  of  trade 
in  accordance  with  the  purposes  of  the  Navigation  Acts.  Al- 
though the  English  government  showed  little  disposition  to 
enforce  these  laws,  the  colonies  recognized  the  right  of  Parlia- 
ment to  regulate  commerce,  and  if  dues  had  been  demanded 
on  this  score  alone  it  is  possible  that  open  hostilities  would 
have  been  long  deferred.  There  might  have  been  irritation 
and  protests,  but  the  abstract  political  privilege  of  England 
was  acknowledged.  As  Rufus  Choate  said,  "  Even  James  Otis 
in  that  great  argument  of  1761,  upon  the  subject  of  writs  of 
assistance,  which  breathed  (I  may  use  the  vivid  expression  of 
John  Adams)  '  the  breath  of  life  into  America,'  admitted,  upon 
the  ground  of  necessity,  the  power  of  England  to  pass  her 
whole  series  of  acts  of  trade  '  as  regulations  of  commerce,' 
while  he  utterly  denied  their  validity  as  laws  of  revenue." 
Original  evidence  in  regard  to  the  attitude  of  the  colonists 
may  be  found  in  a  resolution  put  forth  by  the  colonists 
in  one  of  their  declarations  of  rights  :  "  But  from  the  necessity 
of  the  case,  and  a  regard  for  the  mutual  interests  of  both 
countries,  we  cheerfully  consent  to  the  operation  of  such 
acts  of  the  British  Parliament  as  are  bond  fide  restrained  to 
the  regulation  of  our  external  commerce  for  the  purpose  of 
securing  the  commercial  advantages  of  the  whole  empire  to 
the  mother-country  and  the  commercial  benefits  of  its  re- 
spective members ;  excluding  every  idea  of  taxation,  internal 
or  external,  for  raising  a  revenue  on  the  subjects  in  America 
without  their  consent." 

In  1763  England  determined  to  strengthen  her  military 
position  against  France  ;  and,  in  order  to  prosecute  war  more 
vigorously  and  promptly  than  she  had  been  able  to  do  in  the 
past,  to  quarter  a  permanent  body  of  troops  in  America.  For 
this  purpose  ^300,000  were  needed  annually,  and  it  was  pro- 
posed by  the  English  ministry  that  one-third  of  this  sum  should 
be  assessed  upon  the  colonies  through  stamp  duties  levied 
upon  certain  legal  and  commercial  papers.     This  was  an  in- 


32  Colonial  Finance.  [§  12 

ternal  tax  requiring  for  its  collection  special  officials,  and  was 
a  clear  departure  from  the  principle  of  levying  duties  for  the 
restriction  of  trade,  and  it  was  also  inquisitorial  as  compared 
with  customs  duties.  The  principle  that  taxation  should 
depend  upon  consent  of  the  payers  had  long  been  claimed  as 
a  fundamental  right  and  had  been  incorporated  in  early  legisla- 
tion. Not  only  was  the  order  given  to  enforce  the  commercial 
laws  with  vigor,  but  new  import  duties  were  placed  upon 
molasses,  coffee,  and  East  India  goods,  white  sugar  and  indigo 
from  foreign  colonies,  Spanish  and  Portuguese  wine,  and  wine 
from  Madeira  and  the  Azores.  The  radical  change  in  policy 
of  the  home  government  aroused  great  opposition,  and  the 
agitation  thus  began  swept  away  the  theoretical  reasoning 
which  had  previously  distinguished  between  external  and  in- 
ternal taxation,  and  led  to  hostility  to  all  forms  of  taxation  by 
England,  whether  by  excise  or  customs  duties.  The  maxim 
that  there  should  be  no  taxation  without  representation  became 
a  part  of  the  avowed  current  political  philosophy. 

The  stamp  tax  was  abandoned  in  1766,  but  a  year  later  the 
English  ministry  returned  with  renewed  vigor  to  its  policy  of 
taxation,  and  imposed  import  duties  upon  glass,  red  and  white 
lead,  painters'  colors,  paper,  and  tea.  It  was  estimated  that 
the  yield  of  the  tax  would  be  about  ^400,000.  It  was  natural 
that  the  opposition  to  this  measure  should  be  great.  The 
former  protest  had  been  effectual  and  there  was  reason  to 
hope  that  popular  agitation  would  once  more  gain  a  victory. 
As  a  result  of  the  refusal  to  consume  imported  goods,  the  yield 
of  the  tax  was  only  ^16,000,  of  which  more  than  ^15,000 
were  spent  for  collections.  In  1770  the  duties  were  repealed, 
save  upon  tea.  It  was  not  long,  however,  before  the  final 
break  with  England  came,  for  reasons  in  which  taxation  played 
only  a  part ;  nevertheless  these  measures  led  to  a  vigorous  dis- 
cussion of  the  fundamental  principles  of  the  right  of  taxation, 
a  discussion  which  found  its  ultimate  solution  only  in  war. 


CHAPTER  II. 
REVOLUTION  AND  THE  CONFEDERACY,  1775-1788. 

13.    References. 

Bibliographies:  Charming  and  Hart,  319;  Bogart  and  Rawles,  9-15  ; 
J.  Winsor,  Narrative  History  of  America,  VII,  81-82;  C.  J.  Bullock, 
Finances  of  the  United  States  from  1775  to  1789,  at  beginning  of  each 
chapter,  and  page  266. 

General  Reading  :  J.  P.  Gordy,  History  of  Political  Parties,  I,  chs. 
2,  3,  4 ;  A.  B.  Hart,  III,  120-137;  R.  Hildreth,  History  of  the  United 
States,  III  (consult  index  under  paper  money,  conventions  financial,  esti- 
mates, expenditures,  requisitions,  Morris,  Robert) ;  McMaster,  I,  139- 
144,  187-193,  202-208,  266-270,  281-293,  33I-3DI-  Proposals  to  Amend 
the  Articles  of  Confederation  in  Amer.  History  Leaflets,  No.  28  (July, 
1896)  ;  Elliot's  Debates,  I,  96  (address  to  States  by  Congress) ;  106  (reply 
to  R.  I.);  V,  1-108  (consult  index:  loans,  taxation,  paper  money);  109- 
122  (note  by  Madison). 

Special  Works:  Bullock,  as  above  (most  valuable  single  study); 
W.  G.  Sumner,  Financier  and  Finances  of  the  American  Revolution ; 
Bolles,  I ;  G.  W.  Greene,  Historical  View  of  the  American  Revolution, 
137-172. 

Paper  Money  :  J.  Elliot,  Funding  System,  6-16  (paper  issues) ;  C.  J. 
Bullock,  60-78;  H.  White,  134-148;  W.  B.  Holt  in  Sound  Currency,  V, 
81-112;  J.  J.  Knox,  9-12;  F.  A.  Walker,  Money,  326-336;  Bolles,  I, 
especially  chs.  3,  9,  13;  W.  G.  Sumner,  History  of  American  Currency, 
43-54;  De  Knight,  12-17. 

Loans,  domestic:  Bolles,  I,  chs.  4-7,  18;  foreign:  Bolles,  I,  ch.  17; 
Morse,  Life  of  Benjamin  Franklin,  300-332;  Franklin's  Works  (Bigelow, 
ed.),  vol.  Vl-VIli;  De  Knight,  17-20,  29-32;  Bayley,  299-316;  Mc- 
Master, I,  227-230. 

Taxation  :  Federalist,  Nos.  30-36  (taxation);  Bolles,  I, ch.  14;  G.  T. 
Curtis,  Constitutional  History  of  the  U.  S.,  1 14-134,  162-167;  J.  Story, 
Commentaries,  Bk.  II,  ch.  4,  sect.  253-265;  W.  Hill,  Early  Stages  of 
Tariff  Policy  in  Pub.  Am.  Econ.  Assn.,  VIII,  38-107;  M.  E.  Kelley, 
Tariff  Acts  under  the  Confederation  in  Quar.  your,  of  Econ.,  II,  473-481 ; 
G.  Bancroft,  History  of  the  Constitution  ;  T.  Pitkin,  Statistical  View,  26- 
33  (ed.  1835)  ;  E.  P.  Oberholtzer,  Robert  Morris,  1 17-120. 

Administrative  Machinery:  Bolles,  I,  9-22,  109-116,  267-269, 
305-308,  334-340;  J.    C.   Guggenheimer,   Development  of  the   Executive 

3  33 


34        Revolution  and  the  Confederacy.      [§  J4 

Departments  in  Essays  in  the  Constitutional  History  of  the  U.  S.,  122-137, 
154-160. 

Bank  :  Bolles,  I,  273-275 ;  J.  Sparks,  Life  of  Gouvemeur  Morris,  I,  227- 
242;  W.  G.  Sumner,  Alexander  Hamilton,  107-115;  J.  J.  Knox,  History  of 
Banking,  25-32;  W.  G.  Sumner,  Financier  of  the  Revolution,  II,  25-35, 
183-192. 


14.    Governmental  Confusion. 

The  first  Continental  Congress,  which  met  September  5, 
1774,  contented  itself  with  public  addresses.  Open  warfare 
did  not  begin  until  the  following  spring ;  at  first  the  organiza- 
tion of  the  militia  and  the  burden  of  its  support  were  sustained 
by  the  several  protesting  colonies,  and  not  until  June,  1775, 
did  Congress  order  the  raising  of  an  American  Continental 
army.  This  was  followed  in  September  by  legislation  for 
fitting  out  a  navy,  and  later  by  the  establishment  of  a  com- 
mittee for  foreign  affairs ;  the  supervision  of  the  frontier 
Indians  and  the  administration  of  the  post-office  were  also 
added  to  the  duties  of  Congress.  For  the  carrying  on  of 
these  various  activities  revenue  was  obviously  needed,  but 
the  Continental  Congress  and  such  governmental  machinery 
as  existed  had  no  compelling  powers  for  the  collection  of 
funds.  The  government  was  a  creature  of  emergency ;  the 
colonists  were  content  to  follow  and  obey  their  legislative 
body  against  a  common  enemy,  England,  but  they  recognized 
no  authority  which  could  coerce  revenue  from  themselves. 
Associated  in  a  struggle  against  what  was  termed  unlawful 
taxation,  the  colonists  showed  no  disposition  to  entrust  the 
power  of  taxation  to  a  body  of  delegates  whose  authority  did 
not  rest  upon  an  organic  constitution.  The  financial  meas- 
ures undertaken  to  carry  on  the  struggle  were  conse- 
quently as  revolutionary  as  the  war  itself.  There  could  be 
no  consistent  policy ;  and  what  little  system  there  was  speed- 
ily broke  down  because  of  inherent  defects.  From  the 
confused  action  of  the  time  we  may  separate  the  following 
questions  as  of  permanent  and  special  interest  to  the  student 
of  finance  :  — - 


§  J4]  Governmental  Confusion.  35 

1 .  The  issue  of  bills  of  credit. 

2.  The  financial  relations  of  Congress  to  the  States  and  the 
system  of  requisitions. 

3.  The  borrowing  of  funds  both  at  home  and  abroad. 

4.  The  ineffectual  struggle  to  secure  national  taxation. 

In  the  adjustment  of  the  several  methods  of  revenue  to  one 
another  there  was  no  well-defined  plan;  Congress  did  one 
month  what  it  had  vigorously  opposed  a  month  previously. 
In  general,  reliance  was  placed  at  the  outset  upon  the  issue 
of  bills  of  credit ;  borrowing  was  then  begun  in  a  small 
measure,  and,  as  the  struggle  continued,  developed  more 
extensively,  particularly  from  Holland  and  France.  Begin- 
ning with  about  1778  many  requisitions  were  systematically 
made  upon  the  States,  to  be  met  by  local  taxes ;  and  finally 
in  the  latter  part  of  the  war  a  change  was  made  in  the 
financial  machinery  of  the  administration  by  concentrating 
responsibility  upon  one  person  instead  of  distributing  it  in 
committees.  With  this  change  came  the  suggestion  of  a 
bank,  which  would  extend  the  helping  hand  of  private  credit 
after  public  credit  was  paralyzed. 

Owing  to  the  troubled  conditions  under  which  the  Con- 
tinental Congress  and  the  national  government  were  estab- 
lished, to  the  fluctuating  value  of  the  depreciated  paper 
currency  which  was  issued  in  enormous  amounts,  and  to  the 
indefinite  relations  between  Congress  and  the  several  States, 
—  it  is  difficult  to  present  exact  statements  of  the  receipts  and 
expenditures  of  the  government  during  the  revolutionary 
period.  From  such  data  as  are  available  the  income  of  the 
continental  treasury  from  1775  to  TT^3  as  measured  in  specie 
has  been  calculated  as  follows  :  — 

Paper  money $37,800,000 

Domestic  loans 11,585,506 

Foreign  loans 7,830,517 

Taxes 5,795,000 

Miscellaneous  receipts 2,852,802 

Total  income $65,863,825 

Outstanding  certificates  of  indebtedness  ....     $16,708,000 


36        Revolution  and  the  Confederacy.      [§  lS 

If  the  total  cost  of  the  war  were  sought,  there  should  be 
added  to  the  above  sums  the  expenditures  of  the  several 
States. 

15.    Issues  of  Bills  of  Credit;  Continental  Money. 

Almost  the  first  financial  step  of  Congress  after  hostilities 
began  was  to  vote  an  issue  of  paper  money,  and  within  a  week 
of  the  battle  of  Bunker  Hill,,  under  date  of  June  22,  1775, 
authority  was  given  for  an  issue  of  $2,000,000  of  bills  of  credit 
based  upon  the  credit  of  the  States,  with  a  careful  apportion- 
ment of  the  amount  each  colony  should  redeem  between  1779 
and  1782.  Between  that  date  and  November  29,  1779,  a 
period  of  about  four  years  and  a  half,  forty  of  these  emissions 
with  a  total  issue  of  $241,552,780  were  authorized,  and  there 
is  a  strong  possibility  that  more  was  surreptitiously  put  out  by 
the  embarrassed  treasury  officials.  At  no  time,  however,  was 
the  amount  above  named  in  circulation,  since  from  the  begin- 
ning there  was  some  small  redemption  ;  no  more  were  printed 
after  1779,  when  Congress  voted  that  the  amount  of  bills  in 
circulation  should  not  exceed  $200,000,000.  Tabulated  by 
years  the  number  of  issues  and  amounts  authorized  were  as 
follows  :  — 


No.  of  resolves 
authorizing  issues 

Amounts 

1775  .... 

1776  .... 

1777  .... 

1778  .... 

1779  .... 

3 

4 
5 
•4 
14 

$6,000,000 
19,000,000 
13,000,000 
63. 5001300 
140,052,480 

Total    .... 

40 

$24i»552>78° 

In  addition  to  the  continental  issues  the  States  put  out 
$209,524,776  of  paper  notes.  Of  this  sum  more  than  one- 
half  ($128,441,000)  was  issued  by  Virginia  alone  ;  $33,325,000 
by  North  Carolina,  and  $33,458,926  by  South  Carolina;   New 


§  15]  Issues  of  Bills  of  Credit.  37 

England  and  the  Middle  States  in  this  crisis  were  more  sparing 
with  their  issues. 

The  continental  bills  were  of  various  denominations ;  in  the 
first  issue  of  1775  it  was  voted  that  there  should  be  49,000 
bills  of  one,  two,  three,  four,  five,  six,  seven,  and  eight  dollars  ; 
in  the  next  year  Congress  authorized  a  considerable  amount 
of  small  bills  in  notes  of  fractional  parts  of  a  dollar,  as  two- 
thirds,  one-half,  one-third,  and  one-sixth.  In  later  issues 
larger  denominations  were  printed,  running  as  high  as  sixty- 
five  dollars.  The  first  issues  could  not  be  supplied  as  rapidly 
as  needed,  and  it  was  quickly  found  that  the  signing  of  the 
notes  would  take  more  time  than  members  could  possibly 
devote  to  the  task ;  consequently  twenty-eight  gentlemen 
were  named  and  compensated  to  be  signers  of  bills,  each  bill 
being  signed  by  two  persons.  Much  disorder  was  introduced 
by  the  counterfeiting  of  notes  both  by  English  and  Americans, 
and  many  efforts  were  made  to  prevent  it,  by  altering  plates, 
calling  in  certain  issues,  and  requesting  States  to  pass  severe 
laws  for  the  punishment  of  counterfeiters. 

So  far  as  declarations  went  Congress  entered  upon  the 
printing  of  bills  with  abundant  forethought ;  the  pledge  of 
the  faith  of  Congress  was  early  given,  and  a  method  of 
redemption  was  recommended.  The  first  issue  was  put  forth 
to  meet  the  immediate  emergency  of  a  projected  war;  the 
subsequent  issues  were  authorized  as  a  last  resort  because  of 
the  failure  of  the  States  to  contribute.  It  must  constantly  be 
borne  in  mind  that  there  was  no  real  national  government ; 
Congress  was  little  more  than  a  debating  association  made 
up  of  representatives  of  the  several  new  States  ;  legislation 
was  practically  limited  to  recommendations  instead  of  the 
enacting  of  law  ;  and  when  Congress  voted  recommendations 
it  was  assumed  that  the  States  would  support  by  appropriate 
legislation  the  votes  of  their  respective  delegations.  In  the 
month  following  the  first  issue  of  bills  of  credit,  Congress 
asked  that  each  colony  provide  ways  and  means  to  sink  its 
proportion    of  bills,    and    crudely    apportioned    the    respon- 


38        Revolution  and  the  Confederacy.      [§  15 

sibility  among  the  States  according  to  population,  including 
negroes. 

It  was  suggested  that  the  payments  be  made  in  four  instal- 
ments, beginning  with  November  30,  1779,  and  that  this  could 
be  brought  about  by  the  adoption  of  provisions  that  the  notes 
be  receivable  by  the  colonial  governments  for  State  taxes,  and 
then  be  transferred  to  Congress  in  payment  of  the  amounts 
assigned  to  the  several  States.  Again,  upon  the  issue  of 
$5,000,000,  ordered  May  9,  1776,  Congress  voted  that  the 
thirteen  united  colonies  be  pledged  for  its  redemption  at  such 
periods  and  in  such  manner  of  appropriation  as  Congress 
shall  hereafter  direct.  In  a  circular  "  Letter  of  Congress  to 
the  Inhabitants,"  in  the  autumn  of  1779,  solemn  attention  is 
directed  to  the  fact  that  the  people  had  pledged  their  faith 
for  the  redemption  of  the  bills,  not  only  collectively  through 
their  representatives,  but  individually.  With  no  power  of 
taxation,  Congress  could  with  little  consistency  pledge  itself 
for  redemption,  but  had  to  place  the  pledge  upon  the  several 
States.  This  reliance  was  a  vain  hope,  for  the  States,  instead 
of  rendering  their  proportionate  shares,  increased  the  difficul- 
ties by  making  note  issues  of  their  own. 

Congress  itself  did  not  declare  these  continental  notes  to 
be  legal  tender,  but  called  upon  the  States  to  devise  the 
necessary  legislation  inflicting  forfeitures  and  penalties  upon 
those  refusing  to  accept  the  bills.  This  recommendation  was 
more  acceptable  than  that  of  provision  for  redemption,  and 
it  was  generally  enacted  by  the  several  States  that  a  refusal  to 
accept  the  bills  constituted  an  extinguishment  of  the  debt. 
Closely  allied  with  the  enactment  of  State  legal-tender  laws 
to  give  support  to  the  bills  was  the  passage  of  resolutions  in 
Congress  in  denunciation  of  all  persons  who  refused  to  re- 
ceive bills.  On  November  23,  1775,  suc^  disloyal  action 
was  brought  to  the  attention  of  Congress,  and  a  com- 
mittee was  appointed  to  consider  the  matter.  A  report 
was  submitted,  and  it  was  resolved  "  That  if  any  person 
shall   hereafter  be   so  lost  to    all  virtue   and   regard  for  his 


§  16]        Depreciation  of  the  Currency.  39 

country  as  to  refuse  .  .  .  ,  such  person  shall  be  deemed  an 
enemy  of  his  country." 

With  similar  ends  in  view  was  passed  legislation  to  enforce 
the  regulation  of  prices  when  depreciation  of  the  bills  became 
most  marked ;  monopolizers  and  engrossers  were  severely 
denounced  ;  and  after  seeking  to  punish  by  fine  and  imprison- 
ment persons  who  should  advance  the  price  of  commodities, 
the  different  States  began  to  hold  price  conventions  and  to 
attempt  to  fix  prices  of  labor  and  of  commodities.  The  first 
of  these  assemblages  was  held  at  Providence  in  December,  1776, 
whereupon  Congress  recommended  the  plan  to  other  States. 

16.    Depreciation  of  the  Currency. 

Since  all  the  attempts  to  support  the  credit  of  the  bills 
failed,  depreciation  set  in  early  and  was  quickly  accelerated. 
There  is  some  dispute  as  to  the  exact  date  when  the  bills  first 
fell  from  grace ;  according  to  Ramsay,  the  people  at  first 
received  the  currency  willingly,  and  during  the  last  months 
of  1776  the  depreciation  was  slight  and  gradual;  but  when 
the  amount  of  the  issues  exceeded  $20,000,000,  "  there  was 
a  point  both  in  time  and  quantity  beyond  which  this  congres- 
sional alchemy  ceased  to  operate."  In  1779  the  depreciation 
became  very  marked,  and  during  that  year  the  values  of  the 
continental  currency  in  specie  on  successive  dates  was  as 
follows  :  — 

1779    January  14,    8  to  1  1779    June  4,                  20  to  1 

February  3,  10  "  "  September  17,      24  "  " 

April  2,          17  "  "  October  14,          30  "  " 

May  5,           24  "  "  November  17,  38^  u  " 

Congress  was  exceedingly  slow  to  recognize  officially  in  the 
finance  accounts  that  there  was  depreciation,  but  finally,  on 
March  18,  1780,  it  confessed  judgment  and  made  provision 
for  the  acceptance  of  paper  in  the  place  of  silver  at  the  rate  of  40 
to  1.  A  tax  of  $15,000,000  a  month  for  thirteen  months  was 
levied  upon  the  States,  to  be  paid  in  bills  of  the  old  emissions  ; 


40        Revolution  and  the  Confederacy.      [§  16 

these  in  turn  were  to  be  destroyed  and  replaced  by  a  new 
tenor  or  issue,  in  an  amount  not  exceeding  one-twentieth  of 
the  face  value  of  the  old  issue.  Six-tenths  of  these  bills  were 
to  be  paid  to  the  States  and  the  rest  retained  for  national  pur- 
poses. The  new  bills  were  to  be  redeemable  in  specie  in  five 
years,  to  bear  interest  at  5  per  cent.,  and  to  be  receivable 
for  taxes.  Under  this  law  $119,400,000  of  notes  were  paid 
in  by  the  States  and  destroyed  ;  of  the  new  tenor  notes  only 
$4,400,000  were  actually  issued. 

Congress  also  attempted  to  give  some  order  to  the  depreci- 
ation by  resolving  "  that  the  value  of  the  bills  when  loaned  shall 
be  ascertained  by  computing  these  on  a  progressive  rate  of  de- 
preciation commencing  with  September  1,  1777,  and  continu- 
ing to  March  18,  1780,  in  geometrical  progression  and 
proportional  to  the  time  from  period  to  period,  assuming  the 
depreciation  at  the  several  periods  to  be  as  follows : "  * 

On  March  1,  1778,      1.75  for  one  Spanish  milled  dollar 
On  Sept.  1,  1778,        4  "  " 

On  March  1,  1779,    18  "  "  "  " 

On  March  r  8,  1780,  40  "  "  " 

Congress  also  at  this  time  advised  the  States  to  repeal  the 
punitive  legislation  directed  against  those  who  refused  to  re- 
ceive the  bills. 

As  to  the  actual  sacrifice  by  the  people  measured  in  the 
commodities  which  they  gave  for  the  national  paper  currency 
which  was  issued,  no  exact  statement  is  possible,  but  various 
estimates  have  been  made  of  the  specie  value  of  the 
total  issues:  Jefferson  placed  it  at  $36,367,000,  Hildreth 
at  $70,000,000,  Bronson  at  $53,000,000,  and  Bullock  more 
recently  makes  an  independent  calculation  and  arrives  at 
estimates  varying  from  $37,800,000  to  $41,000,000. 

The  old  continental  currency  after  1780  depreciated  more 

1  In  this  scale  it  was  assumed  that  there  was  no  depreciation  until 
September  2,  1777.     The  table  may  be  found  in  Finance,  V,  766. 


§  17]        Was  Paper  Money  Necessary  ?  41 

rapidly  than  ever.  In  January,  1781,  it  was  valued  at  100  to 
1,  and  in  May  of  that  year,  says  Pelatiah  Webster,  "  it  ceased 
to  pass  as  currency,  but  was  afterwards  bought  and  sold  as  an 
article  of  speculation,  at  very  uncertain  and  desultory  prices, 
from  five  hundred  to  one  thousand  to  one."  And  another 
writer,  Breck,  says  :  "  The  annihilation  was  so  complete  that 
barber-shops  were  papered  in  jest  with  the  bills ;  and  the  sail- 
ors, on  returning  from  their  cruise,  being  paid  off  in  bundles 
of  this  worthless  money,  had  suits  of  clothes  made  of  it,  and 
with  characteristic  light-heartedness  turned  their  loss  into  a 
frolic  by  parading  through  the  streets  in  decayed  finery  which  in 
its  better  days  had  passed  for  thousands  of  dollars."  The  final 
and  official  fate  of  the  Continental  currency  was  not  much 
more  glorious.  Under  the  funding  act  of  1  790  small  amounts 
of  new  tenor  notes  were  received  in  subscription  for  stock  ; 
but  the  older  notes  were  accepted  only  at  the  rate  of  100  to 
1,  and  of  the  $78,000,000  then  estimated  to  be  outstanding 
only  about  $6,000,000  were  subscribed  for  stock.  The  re- 
mainder had  probably  been  lost  or  destroyed. 

17.    "Was  Paper  Money  Necessary? 

How  far  was  the  issue  of  these  bills  necessary  for  the  main- 
tenance of  the  independence  of  America?  The  experience  of 
the  United  States  in  the  issue  of  bills  of  credit  has  furnished 
the  stock  example  to  nearly  every  writer  on  the  subject  of 
money.  No  criticism  has  been  too  severe.  "  Paper  money," 
said  Pelatiah  Webster,  a  contemporary  of  the  Revolution, 
"  polluted  the  equity  of  our  laws,  turned  them  into  engines  of 
oppression,  corrupted  the  justice  of  our  public  administration, 
destroyed  the  fortunes  of  thousands  who  had  confidence  in  it, 
enervated  the  trade,  husbandry,  and  manufactures  of  our 
country,  and  went  far  to  destroy  the  morality  of  our  people." 
Later  writers  have  arraigned  the  political  leadership  of  the 
Revolution  because  Congress  did  not  try  taxation  at  the  out- 
set, urging  that  the  colonists  were  accustomed  to  taxation, 
and  were  well  able  to  bear  it.     It  is  said  that  the  States  at  an 


42        Revolution  and  the  Confederacy.     [§  l7 

early  period  of  the  war  "  when  the  fever  was  up  "  would  have 
freely  followed  "  recommendations  "  of  Congress,  and  that  it 
was  only  natural  that  the  States  should  refuse  the  more  vigor- 
ous method  of  taxation  after  Congress  had  exhibited  a  policy 
of  weakness  and  error. 

If  we  consider  only  what  is  possible  among  a  people  properly 
grounded  in  the  principles  of  monetary  science,  the  criticism 
against  the  issue  of  paper  currency  during  the  Revolution  is 
justifiable ;  but  the  question  is  not  what  might  conceivably 
have  been  done,  but  what  could  be  done  in  America  during 
the  Revolution  by  fallible  statesmen.  The  nation  was  en- 
gaged in  a  struggle  for  existence ;  at  such  a  time  the  rules  of 
monetary  art,  like  the  ordinary  rules  and  methods  of  civil  pro- 
cedure, must  give  way  to  the  prime  necessity  of  using  all  the 
resources  available.  If  the  result  is  disastrous,  war  means  a 
measure  of  disaster  and  loss  !  Whether  the  sacrifice  could 
have  been  lessened  by  a  refusal  to  issue  these  forced  loans 
upon  the  people  is  a  fair  question  for  discussion,  but  cannot 
be  settled  simply  by  the  accumulation  of  proof  that  the  mone- 
tary system  broke  down.  Besides  the  issue  of  treasury  notes, 
there  are  at  all  times  practically  only  two  other  policies  open 
to  a  nation  :  borrowing  by  voluntary  loans,  and  taxation.  At 
the  initiation  of  the  struggle  it  could  not  be  hoped  that  the 
colonies  would  be  able  to  borrow  abroad,  and  indeed,  if  it  had 
not  been  for  the  hostile  feeling  of  France  to  England,  there  is 
no  reason  to  suppose  that  the  new  republic  in  the  early  stages 
of  the  struggle  could  have  borrowed  in  Europe  at  all.  As  for 
borrowing  at  home,  that  implies  an  amount  of  free  capital 
which  did  not  exist  in  America  at  that  time.  The  difficulties 
of  laying  adequate  taxation  under  the  existing  plan  of  confed- 
erated government  was  equally  great ;  for  to  grant  such  a 
power  meant  for  the  States  to  abdicate  their  privilege  of  self- 
taxation  enjoyed  as  colonies  and  to  give  up  their  political 
independence  on  a  money  issue.  The  colonies,  it  must  be 
recalled,  had  chafed  under  the  restrictions  placed  by  Parlia- 
ment upon  colonial  issues,  and  it  was  natural  that  one  of  the 


§  17]       Was  Paper  Money  Necessary  ?  43 

first  measures  of  popular  protest  should  be  a  return  to  the 
issues  of  paper  which  England  had  denied  them.  Connecti- 
cut, Massachusetts,  and  Rhode  Island,  in  May,  1775,  a 
month  before  Congress  acted,  voted  local  issues,  and  in 
June  three  other  colonies  followed.  Acting  under  an  emer- 
gency it  could  not  be  expected  that  Congress  would  frame 
an  independent  policy  which  might  antagonize  its  constit- 
uents ;  nor  was  this  a  time  to  eradicate  financial  delusions 
by  a  campaign  of  education.  The  responsibility  therefore 
in  a  large  degree  must  be  thrown  back  upon  the  provincial 
assemblies. 

The  danger  of  the  issues  was  recognized  at  the  time  by  the 
leaders  of  public  opinion ;  there  was  a  substantial  element  of 
the  population,  particularly  in  the  larger  cities  in  the  East, 
which  stood  aloof  from  the  revolt  against  England,  not  so 
much  out  of  opposition  as  because  of  the  fear  that  independ- 
ence would  bring  excessive  issues  of  paper  money  with  all 
its  consequent  derangement  to  business  affairs.  Popular 
opinion,  however,  was  yet  to  be  convinced  that  either  States 
or  nation  or  individuals  must  inevitably  suffer ;  and  allied 
with  popular  ignorance  was  the  more  conscious  effort  for 
relief,  if  not  repudiation,  on  the  part  of-  debtors  in  the 
community,  who  hoped  to  find  in  an  inflated  currency  an 
easier  way  to  discharge  obligations.  The  actual  loss  to 
the  individual  was  in  part  disguised  by  the  fact  that  the 
continental  currency  passed  from  hand  to  hand  in  daily 
transactions,  and  thus  the  depreciation  was  distributed.  The 
revolutionary  issues  are  not  to  be  regarded  as  an  isolated  act, 
but  as  the  culminating  incident  in  a  half  century  of  financial 
experience ;  moreover,  the  issues  were  made  in  so  wholesale 
a  fashion,  the  responsibility  of  maintaining  their  credit  was 
so  largely  divided,  the  tie  between  issue  and  redemption  was 
so  weak,  that  the  lesson  then  learned  is  little  applicable  to 
modern  conditions,  and  we  cannot  get  much  practical  help 
for  sound  finance  out  of  a  general  denunciation  of  the 
continental  currency. 


44        Revolution  and  the  Confederacy.      [§  18 

18.    State  Taxation  and  Requisitions. 

In  its  attempts  at  taxation  Congress  was  unsuccessful,  for 
here  again  it  had  no  independent  power  of  securing  revenue. 
The  State  might  be  asked  to  contribute  fixed  sums,  but  the 
request  had  no  compelling  power  and  was  but  feebly  honored. 
Whether  the  States  could  have  raised  by  direct  methods  of 
taxation  sufficient  supplies  for  current  needs  of  war,  is  a 
question  which  it  is  impossible  to  decide.  But  it  must  be 
remembered  that  the  taxing  systems  in  local  operation  were 
of  a  simple  character,  designed  only  for  small  peace  expendi- 
tures, and  that  their  development  in  times  of  war,  when  there 
was  a  partial  occupation  of  territory  by  the  enemy,  would  have 
been  extremely  difficult.  Even  during  the  French  and  Indian 
Wars,  the  people  in  the  richer  and  longer  settled  portions  of 
the  country  were  free  from  the  harassing  disturbances  of 
military  campaigns.  To  meet  the  extraordinary  needs  for  na- 
tional military  purposes  which  were  necessitated  by  revolt  was 
a  problem  which  the  art  of  taxation  as  then  developed  in 
America  was  not  prepared  to  solve.  In  the  instructions  which 
were  prepared  for  Franklin  in  October,  1778,  excuses  were 
made  for  the  neglect  of  taxation  :  it  was  argued  that  America 
had  never  been  heavily  taxed,  nor  for  a  continued  length  of 
time  ;  and,  since  the  contest  was  upon  the  very  question  of 
taxation,  the  laying  of  imposts,  unless  from  the  last  necessity, 
would  be  madness. 

What  was  accomplished  by  the  mild  method  of  requisitions, 
or  assessment  of  taxes  on  States,  may  easily  be  described. 
Beginning  with  November,  1777,  requisition  followed  requisi- 
tion, varying  in  amounts  and  in  times  and  methods  of  payment. 
Some  of  the  amounts  called  for  appear  absurdly  large,  but  they 
measure  the  inflated  prices  of  the  period,  caused  by  the  de- 
preciated currency.  The  States,  however,  did  not  meet  the 
demands  even  with  paper  currency;  between  November  22, 
1777,  and  October  6,  1779,  there  were  four  requisitions  calling 
for  $95,000,000  in  paper  money,  but  the  payments  on  these 


§  19]  Domestic  Loans.  45 

amounted  to  only  $54,667,000.  The  three  specie  requisitions 
of  August  26,  1780,  $3,000,000;  November  4,  1780,  $1,642,- 
988;  March  16,  1781,  $6,000,000,  amounting  in  all  to  $10,- 
642,988,  yielded  only  $1,592,222.  The  productivity  of  the 
several  requisitions  in  specie  value  until  January  1,  1784,  was 
as  follows,  according  to  the  table  prepared  by  Professor 
Bullock  :  — 


Requisitions  (4)  Nov.  22,  1777,  to  Oct.  6,  1779 
Specific  requisition,  1780        ....... 

Specie  requisitions  (3)  before  Oct.,  1781      .     . 
Specie  requisitions  Oct.,  1781,  to  Jan.,  1784     . 

Total  receipts,  value  in  specie      .... 


$1,856,000 

881,000 

1,592,000 

1,466,000 


$5,795,000 » 

In  1 780  resort  was  had  to  a  demand  on  the  States  for 
specific  supplies  of  corn,  beef,  pork,  rum,  hay,  etc.,  —  a  fiscal 
method  recalling  a  stage  of  primitive  economic  organization. 
In  furnishing  these  supplies  there  was  much  inefficiency  and 
great  waste.  Some  of  these  requisitions  provided  that  they 
might  be  met  by  the  payment  of  specie  or  new  tenor  bills,  or 
commissary  certificates,  or  partly  in  certificates  of  interest, 
known  as  indents.  The  system  of  requisitions  proved  of  little 
importance  until  after  the  war  was  over;  it  could  not  succeed, 
for  it  lacked  any  well  organized  plan  of  assessment.  As  Pro- 
fessor Sumner  says,  "  It  was  impossible  to  know  how  much 
each  State  ought  to  pay,  and  there  was  no  adequate  publication 
of  the  facts  as  to  what  each  State  had  paid.  Being  in  the  dark 
as  to  facts,  each  State  maintained  that  it  had  paid  more  than 

its  share." 

19.     Domestic  Loans. 

The  loans  of  the  United  States  during  the  period  1776-1789 
may  be  conveniently  grouped  under  two  headings,  domestic 
and  foreign.  The  borrowing  of  money  by  Congress,  with  the 
exception  of  a  small  loan  in  June,  1775,  for  the  purchase  of 
gunpowder,  was  not  authorized  until  October  3,  1776,  nearly 

1  This  is  exclusive  of  the  requisitions  of  March  18,  1780,  which  were 
laid  for  the  purpose  of  calling  in  the  old  paper,  and  which  yielded  no 
new  net  revenue. 


46        Revolution  and  the  Confederacy.      [§  19 

a  year  and  a  half  after  the  commencement  of  the  Revolution. 
By  that  time  bills  of  credit  had  been  issued,  and  little  was 
forthcoming  in  the  way  of  taxes  for  the  use  of  Congress  ;  con- 
sequently authority  was  given  for  borrowing  $5,000,000  at  the 
rate  of  4  per  cent.  For  placing  the  loan,  loan- offices  were 
established  in  each  State ;  lenders  received  indented  certifi- 
cates corresponding  to  the  modern  coupon  bonds  in  denomi- 
nations from  $300  to  $1000  ;  commissioners,  remunerated  at 
the  rate  of  one-eighth  of  one  per  cent,  on  the  amounts  received, 
were  appointed  by  the  State  authorities,  in  order  to  allay  local 
jealousy  ;  and  payment  was  promised  in  three  years.  The  rate 
of  interest  offered  was  too  low,  and  in  the  subsequent  loans  of 
January  14  and  February  22,  1777,  the  rate  was  increased  to 
6  per  cent.  Again  the  results  were  not  favorable  :  during  the 
first  year  between  October,  1776,  and  September,  1777,  the 
amount  received  was  only  $3,787,000.  About  this  time  Con- 
gress was  able  to  secure  a  loan  from  France,  and  it  was  deter- 
mined to  meet  the  interest  on  the  domestic  loan  certificates 
by  bills  of  exchange  drawn  upon  the  foreign  fund  in  possession 
of  the  American  envoys  in  Paris.  This  increased  the  credit  of 
the  home  loan-offices,  so  that  from  September,  1777,  until  the 
offices  were  closed,  $63,289,000  in  paper  was  subscribed,  of 
which  the  specie  value  was  only  $7,684,000,  according  to  the 
scale  of  depreciation  adopted  by  Congress  in  1780. 

After  March  1,  1782,  the  interest  was  not  met,  and  indents, 
or  certificates  of  interest  indebtedness,  were  issued  ;  since  these 
were  receivable  for  taxes  by  the  States,  they  were  in  part  re- 
deemed and  cancelled  by  payment  into  the  federal  treasury  on 
State  account.  In  addition  to  the  loan-office  certificates,  there 
were  other  forms  of  certificates,  such  as  those  issued  by  quarter- 
masters, commissaries,  and  other  purchasing  agents.  So  urgent 
were  the  needs  of  the  army,  that  throughout  the  war  it  was 
necessary  to  impress  large  quantities  of  supplies,  particularly 
wagons,  horses,  and  aids  for  transportation,  in  return  for  which 
certificates  of  value  were  given.  These  obligations  were  of  a 
great  variety  and  contracted  without  order  or  system,  and  the 


§*o] 


Foreign  Loans. 


47 


amount  outstanding  in  1790  was  estimated  by  Hamilton  at 
$16,708,000.  Short-time  and  temporary  loans  to  the  amount 
of  $1,272,842  were  also  obtained  in  1782  and  1783  from  the 
new  Bank  of  North  America. 

20.     Foreign  Loans. 

Funds  were  obtained  either  in  loans  or  subsidies  from  the 
governments  of  France  and  Spain  and  from  private  bankers 
En  Holland.  The  first  assistance  came  from  France  in  1776 
in  the  form  of  a  subsidy  through  the  agency  of  Beaumarchais, 
over  whose  accounts  the  United  States  afterwards  had  a  pro- 
tracted dispute  •  and  a  small  subsidy  was  secured  from  the 
Spanish  treasury.  Through  the  importunities  of  Franklin, 
France  also  granted  subsidies  of  2,000,000  livres  in  1777  and 
6,000,000  livres  in  1781.  In  all,  these  sums  which  may  be 
regarded  as  gifts,  amounted  to  $1,996,500.  Between  1777 
and  1783  the  United  States  borrowed  from  France,  $6,352,500  ; 
Holland,  $1,304,000;    Spain,  $1 74,017, —  making  a  total  of 

$7»83°.5I7- 

By  years  the  foreign  loans  were  obtained  as  follows :  — 


France 

Spain 

Holland 

'777     •     • 
17/8     •     • 

1779  .     . 

1780  .     . 

1781  .     . 

1782  .     . 
1 7^3 

$181,500 

544,5oo 

181, Soo 

726,000 

<,737,7D3 

1,892,237 

1,089,000 

$128,804 
45.213 

$720,000 
584,000 

Total  .     .     . 

$6,352,5«> 

$174,017 

$1,304,000 

Attempts  were  early  made  to  obtain  loans  to  be  repaid  in 
France,  secured  by  the  exportation  of  goods  from  America, 
particularly  tobacco ;  but  the  danger  of  capture  by  English 
cruisers  broke  this  policy.  The  earlier  negotiations  were 
clothed  in  secrecy  for  fear  on  the  part  of  France  and  Spain 


48         Revolution  and  the  Confederacy.     [§  20 

of  political  complications  with  England ;  and  the  intercourse 
of  the  American  agents  and  later  of  the  envoys  with  the 
French  officials  reveals  most  pathetically  the  financial  straits 
of  the  American  government.  Without  warning  the  en- 
voys were  drawn  upon  by  Congress,  and  only  by  repeated 
pleadings  with  the  French  government  could  they  secure 
funds  with  which  to  honor  the  drafts.  The  French  loans 
were  granted  for  political  reasons,  and  not  until  1 782  did 
there  appear  the  first  evidence  of  a  national  credit  in 
Europe ;  John  Adams  then  secured  loans  from  bankers  in 
Holland,  the  more  welcome  since  after  1783  France  withdrew 
her  aid. 

Congress  first  and  last  authorized  loans  far  larger  than  could 
actually  be  secured,  for  the  needs  of  the  government  were 
unceasing  and  repeated  authorizations  and  applications  had 
to  be  made.  The  foreign  loans  were  either  indefinite  in 
length  or  ran  for  periods  not  over  fifteen  years  ;  interest  was 
5  per  cent.,  except  on  10,000,000  livres  of  the  French 
loans,  which  drew  4  per  cent.  Of  the  sums  loaned  by 
France  little  was  actually  received  by  the  treasury  in  this 
country,  as  it  was  expended  in  France  for  supplies,  but 
one  instalment  served  a  good  purpose  in  paying  the  in- 
terest on  domestic  loans,  and  another  was  the  specie  foun- 
dation of  the  Bank  of  North  America.  The  service  of  France 
to  the  United  States  is  not,  however,  to  be  measured  by  the 
direct  money  payment,  for  it  is  estimated  that  she  spent 
$6,000,000  for  the  French  army  and  navy  in  the  American 
cause. 

The  growing  credit  of  the  new  republic  is  reflected  in  the 
favorable  rate  of  interest,  5  per  cent.,  demanded  on  the 
Dutch  bankers'  loans.  By  1782  it  was  seen  in  Holland 
that  victory  was  assured,  and  there  was  not  only  an  in- 
telligent appreciation  of  the  immense  resources  of  the 
country  which  could  be  applied  to  the  extinction  of  the 
debt,  but  confidence  in  the  political  integrity  of  the  new 
government. 


§  22]        Effort  to  Secure  a  National  Tax.      49 

21.    Financial  Provisions  in  the  Articles  of  Confederation. 

In  1 781  the  Articles  of  Confederation  went  into  effect;  this 
instrument  for  national  government  brought  little  succor  to 
the  treasury.     The  financial  provisions  were  as  follows  :  — 

•  No  State  shall  lay  any  imposts  or  duties  which  may  inter- 
fere with  any  stipulations  in  treaties  entered  into  by  Congress. 

All  expenses  for  the  common  defence  or  general  welfare 
shall  be  defrayed  out  of  a  common  treasury  supplied  by  the 
several  States  in  proportion  to  the  value  of  land  and  improve- 
ments ;  the  taxes  to  be  levied  under  the  direction  of  the 
State  authorities. 

Power  was  given  to  Congress  to  ascertain  the  necessary  sums 
of  money  to  be  raised,  to  appropriate  the  same,  to  borrow  money 
or  emit  bills  on  the  credit  of  the  United  States,  transmitting 
every  half  year  to  the  several  States  an  account  of  the  sums 
borrowed  or  emitted,  these  grants  of  power  being  subject  to 
the  assent  of  nine  States  as  represented  in  Congress. 

The  omissions  were  more  important  than  the  actual  pro- 
visions, though  even  the  latter  were  too  attenuated  to  breathe 
a  healthy  vitality  into  the  administration  of  the  finances.  As 
a  vigorous  commentator  expresses  it,  the  Articles  "  gave  to  the 
confederation  the  power  of  contracting  debts,  and  at  the  same 
time  withheld  the  power  of  paying  them.  ...  It  provided 
the  mode  in  which  its  treasury  should  be  supplied  for  the 
reimbursement  of  the  public  credit.  But  over  the  sources  of 
that  supply,  it  gave  the  government  contracting  the  debt  no 
power  whatever.  Thirteen  independent  legislatures  granted 
or  withheld  the  means  according  to  their  own  convenience." 

22.  Effort  to  Secure  a  National  Tax. 
The  ill  success  of  Congress  in  securing  revenue  from  the 
States  led  in  the  latter  years  of  the  war  to  a  more  determined 
effort  to  obtain  a  national  tax.  As  just  stated,  under  the 
Articles  of  Confederation  adopted  in  1781,  the  powers  of  tax- 
ation were  explicitly  restricted  within  a  narrow  compass,  and, 

4 


50        Revolution  and  the  Confederacy.     [§  22 

more  than  this,  it  was  provided  "  that  no  treaty  of  commerce 
shall  be  made  whereby  the  legislative  power  of  the  respective 
States  shall  be  restrained  from  imposing  such  imposts  and 
duties  on  foreigners  as  their  own  people  are  subjected  to,  or 
from  prohibiting  the  exportation  and  importation  of  any  species 
of  goods  or  commodities  whatsoever."  This  left  the  mak- 
ing of  tariffs  to  the  States.  Though  Congress  could  not  coerce 
it  hoped  to  persuade  ;  following  a  suggestion  of  a  price  con- 
vention held  at  Hartford,  it  early  in  1781  recommended  a  duty 
of  5  per  cent,  upon  imports,  excepting  arms,  ammunition,  and 
clothing,  or  other  articles  imported  for  the  United  States  or  any 
State,  also  excepting  wool  cards  and  cotton  cards,  and  wire  for 
making  them,  and  salt  during  the  war.  Inasmuch  as  unani- 
mous consent  was  necessary  for  constitutional  amendments, 
the  attempt  failed  through  the  opposition  of  one  State, 
Rhode  Island,  which  asserted  that  the  tax  would  bear  more 
heavily  upon  commercial  States,  that  its  collection  would  ne- 
cessitate officers  irresponsible  to  the  State,  and  that  it  would  give 
power  to  Congress  to  collect  money  for  its  expenditures  indefi- 
nitely and  without  accounting  to  the  State.  "  She  considered  it 
the  most  precious  jewel  of  sovereignty  that  no  State  be  called 
upon  to  open  its  purse  but  by  the  authority  of  the  State  and  by 
her  own  officers."  Letters  were  addressed  to  Rhode  Island 
in  protest ;  a  committee  was  sent  to  remonstrate  and  to  con- 
vince, but  the  opposition  was  too  strong.  In  the  midst  of  these 
fruitless  endeavors  Morris  in  1781  proposed  in  addition  a 
land  tax,  a  poll  tax,  and  an  excise  on  distilled  liquors,  from 
each  of  which  it  was  estimated  the  yield  would  be  $500,000, 
and  the  import  duties  were  expected  to  produce  $1,000,000  a 
year.  This  proposition  was  renewed  in  1782,  but  came  to 
naught,  and  the  government  was  still  powerless  to  collect 
revenue. 

In  1783  the  plan  for  a  national  tariff  was  revived  in  a  con- 
stitutional amendment  prepared  by  Congress,  which  provided 
for  specific  duties  on  certain  classes  of  goods,  namely,  liquors, 
sugars,  teas,  coffees,  cocoa,  molasses,  and  pepper,  and  an  ad 


§  22]      Effort  to  Secure  a  National  Tax.         51 

valorem  rate  on  all  other  goods.  The  tariff  was  to  run  for 
twenty-five  years,  and  the  revenue  thus  obtained  was  to  be 
applied  only  to  the  payment  of  interest  on  the  public  debt, 
and  in  no  way  used  for  current  expenditures.  In  order  that 
State  pride  might  be  appealed  to,  and  local  apprehension  of 
the  dangers  of  a  national  system  be  lessened,  the  collection  of 
duties  was  to  be  made  by  State  officials.  The  appeal  met  with 
a  slow  response.  As  late  as  1786,  four  States  had  failed  to 
accept  the  measure,  —  New  York,  Georgia,  Rhode  Island,  and 
Maryland.  During  the  year  the  three  latter  gave  way,  but  this 
time  New  York  was  refractory  and  brought  failure  to  the  plan. 
The  reluctance  of  some  of  the  States  to  grant  a  national 
impost  was  also  due  to  a  commendable  desire  to  secure  com- 
mercial freedom  without  interference.  During  the  war  most 
of  the  local  tariffs  had  been  abandoned,  owing  to  the  interrup- 
tions of  trade ;  later,  when  peace  was  re-established,  many 
people,  remembering  the  harassing  restrictions  of  the  Naviga- 
tion Acts,  which  were  associated  with  a  government  of  tyranny, 
looked  forward  to  opportunities  of  unfettered  trade.  As  a 
historian  of  our  early  tariff  history  says,  "  Liberty  was  the 
watchword  of  the  age.  What  Locke,  Rousseau,  and  Voltaire 
had  done  to  awaken  a  desire  for  political  liberty  and  equality 
the  Physiocrats  and  Adam  Smith  were  doing  for  industrial  and 
commercial  freedom.  Whether  or  no  their  teachings  were 
widely  known  in  America,  the  lawmakers  of  the  time  immedi- 
ately after  the  Revolution  certainly  followed  them  in  leaving 
commerce  as  free  as  possible ;  and  in  some  instances  they 
stated  explicitly  their  adherence  to  the  doctrine  of  free-trade 
and  their  respect  for  the  advocates  of  that  doctrine."  In 
spite  of  these  hopes,  force  of  circumstances  drove  the  new 
States  into  the  contrary  policy  and  the  re-imposition  of  tariffs. 
Burdened  with  debts  the  new  States  felt  the  need  of  revenue 
from  every  possible  source.  The  severity  of  the  English 
trade  laws  was  now  realized  more  acutely  than  when  as 
colonists  they  were  accustomed  to  evade  them,  with  the  tole- 
ration of  England.     As  an  independent  nation  they  were  cut 


52        Revolution  and  the  Confederacy.      [§  23 

off  commercially  from  all  the  advantages  of  the  West  India 
trade.  A  desire  for  retaliation  was  naturally  awakened,  and  in 
some  quarters  the  need  of  protection  was  openly  avowed. 
Even  Massachusetts,  whose  commercial  interests  were  most 
important,  in  1786  passed  a  law  bearing  the  preamble,  "And 
whereas  it  is  the  duty  of  every  people  blessed  with  a  fruitful 
soil  and  a  redundancy  of  raw  materials  to  give  all  due  en- 
couragement to  the  agriculture  and  manufactures  of  their  own 
country  "  ;  and  the  act  specifically  provided  that  more  than  fifty 
different  commodities,  if  produced  on  foreign  soil,  should  be 
declared  contraband  and  prohibited  from  being  brought  into 
the  State.  Other  States,  including  Pennsylvania  and  New  York, 
acted  in  the  same  way.  The  deprivations  caused  by  the  long 
war  had  started  many  manufactures  into  life,  and  for  their  per- 
petuation protective  support  of  tariffs  was  warmly  urged. 

23.    Fiscal  Machinery. 

The  administrative  machinery  in  charge  of  the  finances  of 
the  government  underwent  many  changes  during  the  period 
under  consideration.  For  a  long  time  Congress  jealously  kept 
in  its  own  hands  the  executive  control  as  well  as  legislation. 
In  1775  two  treasurers  were  appointed  to  receive  and  pay  out 
the  public  funds.  Next  a  committee  of  claims  was  authorized, 
composed  of  thirteen  congressional  delegates,  and  this  in  turn 
was  supplemented  in  February,  1776,  by  a  standing  committee 
of  five  members  of  Congress,  whose  business  it  was  to  superin- 
tend the  officials  engaged  in  financial  affairs,  and  to  attend  to 
the  emission  of  bills  of  credit.  This  treasury  board,  under 
which  was  the  office  of  accounts  with  an  auditor-general  at  its 
head,  may  be  regarded  as  the  germ  of  the  later  treasury  de- 
partment. In  1778  the  entire  system  of  book-keeping  was 
remodelled ;  provision  was  made  for  the  appointment  of  a 
comptroller,  auditor,  treasurer,  and  two  chambers  of  accounts ; 
accounts  were  examined  and  adjusted  by  the  auditor  and  sent 
to  one  of  the  chambers  of  accounts  fqr  correction ;  they  were 
then  returned  and  examined  a  second  time  by  the  auditor,  who 


§  23]  Fiscal  Machinery.  53 

had  the  final  decision,  save  upon  appeal  to  Congress.  The 
account  having  been  finally  endorsed  by  the  auditor,  was  for- 
warded to  the  comptroller,  by  whom  drafts  were  issued  on  the 
treasurer.  The  next  year  the  congressional  treasury  was  set 
aside  to  make  place  for  a  new  board  of  five,  of  which  three 
commissioners  should  not  be  delegates  in  Congress. 

The  movement  in  all  the  executive  service  was  toward  con- 
centration of  authority,  and  in  February,  1781,  the  treasury 
commission  was  abolished,  and  in  its  place  was  ordered  the 
appointment  of  a  superintendent  of  finance.  For  this  position 
Robert  Morris  was  chosen.  A  merchant  and  trader  of  Phila- 
delphia, engaged  in  large  affairs,  his  experience  had  made 
him  a  valuable  member  of  the  local  assembly  of  Pennsylvania 
and  of  Congress ;  it  also  opened  the  way  for  charges  of  gain- 
seeking  !  John  Adams  wrote  of  him  :  "  I  think  he  has  a 
masterly  understanding,  an  open  temper,  and  an  honest 
heart ;  and  if  he  does  not  always  vote  for  what  you  and  I 
would  think  proper,  it  is  because  he  thinks  that  a  large  body 
of  people  remain  who  are  not  yet  of  his  mind.  He  has  vast  de- 
signs in  the  mercantile  way,  and  no  doubt  pursues  mercantile 
ends  which  are  always  gain ;  but  he  is  an  excellent  member 
of  our  body."  On  the  face  of  it  Morris  was  given  large 
powers ;  he  was  authorized  to  examine  the  state  of  the  public 
finances,  report  plans  for  getting  revenue,  direct  the  execution 
of  the  orders  of  Congress  respecting  revenues  or  expenditures, 
superintend  and  control  the  settlement  of  the  public  accounts, 
and  perform  other  duties  relating  to  his  department.  Some 
changes  were  also  made  in  the  accounting ;  to  the  comp- 
troller was  given  the  duties  of  the  late  auditor-general,  retain- 
ing none  of  the  functions  possessed  by  the  comptroller  under 
the  law  of  1778;  and  a  register  was  appointed  for  the  first 
time. 

Morris  was  clear  as  to  the  necessities  of  the  time.  On  the 
one  hand  there  must  be  retrenchment  and  economy,  for  which 
there  was  ample  opportunity,  because  of  the  previous  loose 
administration  under  a  system  of  congressional   committees 


54        Revolution  and  the  Confederacy.      [§  24 

which  employed  an  excessive  number  of  agents  and  sub- 
agents  in  buying  and  distributing  supplies.  What  was  of  still 
more  importance,  Morris  endeavored  to  collect  the  requisitions 
from  the  States,  to  create  a  national  revenue  and  impost,  and 
to  place  the  revenue  on  a  specie  basis  in  order  that  some 
degree  of  stability  might  be  introduced  into  the  budget.  He 
put  new  life  into  the  loan  policy  and  hoped  to  plant  govern- 
ment credit  on  a  more  stable  foundation,  through  the  estab- 
lishment of  a  bank  aided  by  his  personal  credit.  Because  of 
his  knowledge  of  mercantile  affairs  and  banking  connections 
abroad  he  knew  how  to  bring  about  more  orderly  dealings  in 
foreign  exchange  in  the  execution  of  the  foreign  loans ;  and 
his  appreciation  of  the  need  of  specie  led  to  greater  pressure 
upon  the  American  envoys  in  foreign  capitals  to  negotiate 
loans.  The  last  investments  from  France  were  useful  in  found- 
ing a  bank,  and  Morris  took  advantage  of  the  improving  credit 
of  the  United  States  as  shown  by  the  Dutch  loans. 

Yet  Morris  after  all  had  little  real  power;  he  could  not 
overcome  the  fundamental  obstacles  in  the  way  of  healthy 
finance ;  State  pride,  jealousy,  and  bickering  withstood  his 
appeals  to  the  States  to  levy  taxes.  Early  in  1783  he  tendered 
his  resignation,  but  was  prevailed  upon  to  continue  in  office 
until  December,  1 784.  There  is  no  doubt  that  difficulties 
were  intentionally  placed  in  his  way  because  of  the  repugnance 
to  giving  powers  of  finance  to  a  single  person.  Morris  was 
charged  with  irregularities  in  his  accounts  and  with  specula- 
tion to  his  own  advantage  in  government  property ;  these 
charges  he  answered  in  detail,  but  his  business  relationships 
were  so  involved  and  his  private  interests  so  complicated  with 
public  affairs  that  it  was  difficult  to  maintain  before  the  public 
a  position  of  impartial  devotion  to  public  welfare. 

24.    Bank  of  North  America. 

The  establishment  of  a  financial  institution  or  bank  was 
early  suggested  as  an  important  aid  to  the  government  in 
organizing  facilities  of  credit       The  first  experiment  under- 


24] 


Bank  of  North  America. 


55 


taken  in  July,  1780,  known  as  the  Bank  of  Pennsylvania,  was, 
in  the  words  of  Morris,  "  nothing  more  than  a  patriotic  sub- 
scription of  continental  money  for  the  purpose  of  purchasing 
provisions  for  a  starving  army."  The  subscribers  protected 
themselves  by  holding  the  bills  drawn  by  Congress  on  the 
envoys  abroad,  as  collateral  security  until  the  supplies  were 
paid  for.  In  the  following  year  Morris  submitted  a  plan  in 
which  a  bank  with  real  commercial  functions  should  be  in- 
corporated ;  its  special  advantage  to  the  government  lay  in 
the  advancing  of  loans  to  the  treasury  in  anticipation  of  ex- 
pected resources.  Congress  consequently  approved  the  rec- 
ommendation and  incorporated  the  Bank  of  North  America 
with  a  permitted  capitalization  of  $10,000,000.  The  amount 
actually  subscribed  was  pitifully  small ;  only  by  the  greatest 
exertions  could  $70,000  be  secured  from  private  subscribers, 
and  if  the  government  had  not  made  a  subscription  of 
$200,000  in  specie,  which  opportunely  arrived  from  France, 
the  project  would  doubtless  have  failed.  The  bank  then  was 
practically  founded  upon  government  funds  but  managed  by 
officials  of  its  own  selection.  Small  short-time  loans  from  the 
funds  subscribed  were  made  by  the  bank  to  the  government, 
and  as  the  treasury  made  a  special  effort  to  repay  these  loans 
in  preference  to  other  claims  the  practical  result  was  the 
maintenance  of  a  convenient  working  balance  which  the  gov- 
ernment could  depend  upon  for  immediate  necessities.  The 
accounts  of  the  bank  with  the  treasury  were  as  follows  :  — 


Amounts  borrowed 

Repayments 

'783 

■784 

$923.3°8 
349.534 

$865,394 

388,981 

18,467 

Total   .... 

$1,272,842 

$1,273,842 

The  bank  paid  in  dividends  to  the  United  States  $22,867, 
while  the  United  States  paid  to  the  bank  for  interest  on  loans 


56        Revolution  and  the  Confederacy.      [§  25 

$29,719.  Besides  direct  loans  to  the  government  the  bank 
was  an  aid  in  discounting  the  notes  of  individuals  who  held 
claims  against  the  government,  and,  from  the  connection  of 
the  wealthy  men  in  the  management  of  the  bank,  inspired  con- 
fidence in  the  abilities  of  the  government  itself  to  meet  its 
obligations  ;  it  gave  Morris  additional  opportunity  to  strengthen 
the  credit  of  the  government  by  his  own  private  endorsement. 
The  relations  of  the  bank  with  the  government  ceased  after 
peace  was  established,  and  the  bank  then  fell  into  popular 
disfavor  in  Pennsylvania,  as  it  was  regarded  as  the  representa- 
tive of  an  oppressive  money  power.  Finally  in  1787  it  secured 
a  charter  from  Pennsylvania  and  as  a  local  institution  entered 
upon  a  long  career. 

25.    Financial  Collapse,  1783-1789. 

The  indebtedness  of  the  national  government  apart  from 
outstanding  bills  of  credit  at  the  beginning  of  1 784  was  sub- 
stantially as  follows : 

Foreign,  including  arrears  of  interest $7,921,886 

Loan  Office  ceitificates 11,585.000 

Unliquidated  certificates  of  indebtedness     ....  16,708,000 

Arrears  of  interest  on  domestic  debt 3,109,000 

Total $  39,323,886 

The  annual  interest  charges  on  this  indebtedness  were 
approximately  $1,875,000,  divided  as  follows:  foreign, 
$375,000 ;  domestic,  $1,500,000.  In  addition  to  the  above 
debt  there  were  the  bills  of  credit  which  had  been  practically 
repudiated,  and  the  indebtedness  of  the  States ;  the  latter 
amounted  to  about  $21,000,000,  of  which  $18,271,787  was 
afterwards  recognized  as  incurred  strictly  for  war  purposes  and 
assumed  in  the  federal  debt  in  1 790. 

At  the  close  of  the  war  a  reduction  in  expenditures  was  ex- 
pected but  was  not  easily  made.  The  pay  of  the  soldiers 
during  the  war  was  inadequate  because  of  the  depreciation 
of  the  paper  currency,  and  was  often  delayed  beyond  the 
limit  of  patience.     Although  the  rank  and  file  were  in  part 


§  25]  Financial  Collapse.  57 

appeased  by  bounty  lands,  the  officers  were  not  so  easily  satis- 
fied, and  on  account  of  their  position  could  more  vigorously 
enforce  their  demands ;  accordingly  in  1 783  it  was  voted  to 
allow  to  the  officers  a  bonus  of  full  pay  for  five  years.  But 
still  there  were  no  funds,  and  once  more  recourse  was  made 
to  promises  and  certificates  of  indebtedness  carrying  interest. 
Government  credit  indeed  sank  so  low  that  liquidated  and 
certificated  claims  against  it  were  worth  less  than  fifteen  cents 
on  a  dollar. 

In  brief,  the  expenditures  valued  in  specie,  from  1 784  to 
1789,  were  $4,432,279.  In  addition  there  were  new  unpaid 
accounts  at  the  national  treasury  in  September,  1789,  of 
$189,906.     The  receipts  for  this  period  were  : 

Requisitions $1,945,325 

Foreign  loans 2,296,000 

Miscellaneous  sums 338,568 

Total $4,579,893 

The  financial  transactions  for  this  period  are  summarized  by 
Bullock  as  follows:  "The  principal  of  the  domestic  debt  had 
been  decreased  $960,915  by  the  receipts  from  the  public 
lands ;  while  the  arrears  of  interest  had  increased  from 
$3,109,000  to  $11,493,858  at  the  end  of  1789,  in  spite  of  the 
fact  that  $2,371,000  of  indents  had  been  drawn  in  by  taxes. 
The  principal  of  the  foreign  debt  had  increased  from  $7,830,- 
517  to  $10,089,707,  while  the  arrears  of  foreign  interest  had 
grown  from  $67,037  to  $1,640,071  at  the  end  of  1789." 

During  these  years  Holland  proved  a  source  of  constant 
help  ;  the  foreign  loans  there  placed,  1 784-1 789,  were  : 

1784 $1,395,200 

1785 53,600 

1786 47,200 

I787 I29,2CO 

178S 270,800 

I789 400,000 

Total $2,296,000 


58        Revolution  and  the  Confederacy.      [§25 

Not  only  did  the  treasury  continue  embarrassed  but  there 
was  much  popular  unrest,  political  and  industrial,  as  is  fre- 
quently the  case  after  a  long  war.  The  issue  of  paper  money 
by  States  was  once  more  agitated,  and  seven  of  the  States,  in- 
cluding Rhode  Island,  New  York,  New  Jersey,  Pennsylvania, 
North  Carolina,  South  Carolina,  and  Georgia,  authorized  new 
emissions.  In  Massachusetts  a  serious  insurrection,  headed  by 
Daniel  Shays,  demanded  the  issue  of  credit  money ;  and  in  the 
other  colonies  there  were  bitter  contests  between  the  party  cf 
inflation  and  its  opponents.  The  reasons  for  distress,  however, 
were  not  fundamental  or  necessarily  long- enduring ;  it  is  a 
mistake  to  conclude  that  the  country  was  drifting  toward  inevi- 
table ruin  because  many  people  were  in  debt.  In  what  way 
the  country  was  suffering  from  the  disturbances  of  war  is  set 
forth  in  the  following  striking  passage  from  a  contemporary 
student  of  finance  and  public  economy,  Tench  Coxe  : 

"  Among  the  principal  causes  of  their  unhappy  situation 
were  the  inconsiderate  spirit  of  adventure  to  this  country,  which 
pervaded  almost  every  kingdom  in  Europe,  and  the  prodigious 
credit  there  given  to  our  merchants  on  the  return  of  peace. 
To  these  may  be  added  the  high  spirits  and  the  golden 
dreams  which  naturally  followed  such  a  war,  closed  with  so 
much  honor  and  success.  Triumphant  over  a  great  enemy, 
courted  by  the  most  powerful  nations  in  the  world,  it  was 
not  in  human  nature  that  America  should  immediately  com- 
prehend her  new  situation.  Really  possessed  of  the  means  of 
future  greatness,  she  anticipated  the  most  distant  benefits  of 
the  Revolution,  and  considered  them  as  already  in  her  hands. 
She  formed  the  highest  expectations,  many  of  which,  however, 
serious  experience  has  taught  her  to  relinquish,  and  now  that 
the  thoughtless  adventures  and  imprudent  credits  from  foreign 
countries  take  place  no  more,  and  time  has  been  given  for 
cool  reflection,  she  can  see  her  real  situation  and  need  not  be 
discouraged." 

At  heart  the  country  was  economically  sound,  but  the 
national  financial  system  was  weak,  and  in  1786  it  broke  down 


§  25]  Financial  Collapse.  59 

completely  ;  further  borrowing  at  home  or  abroad  was  almost 
impossible  ;  requisitions  were  of  slight  avail ;  domestic  creditors 
were  throughly  alarmed,  and  when  the  efforts  to  secure  unan- 
imous consent  for  a  national  tax  failed,  it  was  agreed  that,  if 
a  federated  republic  were  to  continue,  the  government,  par- 
ticularly in  its  relations  to  finance  and  commerce,  must  be 
remodelled.  Every  keen-sighted  statesman  of  the  period  rec- 
ognized the  necessity,  although  there  was  great  variance  of 
opinion  as  to  the  degree  of  readjustment.  The  dissatisfaction 
resulted  in  the  Convention  of  1787,  which  framed  a  new 
constitution. 


CHAPTER  III. 

FINANCIAL   PROVISIONS  OF  THE  CONSTITUTION. 

26.    References. 

J.  Elliot,  Debates,  V;  G.  Bancroft,  History  of  the  Constitution  (con- 
sult table  of  contents) ;  G.  T.  Curtis,  Constitutional  History  of  the  U.  S., 
I,  chs.  26-27  I  R-  Hildreth,  History  of  the  United  States,  III,  508-523 ;  J.  P. 
Gordy,  Political  Parties,  I,  ch.  7 ;  L.  H.  Boutell,  Life  of  Roger  Sherman, 
ch.  8 ;  J.  Story,  Commentaries  on  the  Constitution  (fifth  ed.,  useful  for 
references  to  judicial  opinions),  Bk.  II,  ch.  14  (taxes);  chs.  15,  42 
(loans);  ch.  17  (coinage);  ch.  25  (bank);  ch.  26  (internal  improve- 
ments); T.  M.  Cooley,  Principles  of  Constitutional  Law  (third  ed., 
references  to  judicial  opinions),  ch.  iv,  §  1,  2,  5,  6;  T.  M.  Cooley,  Laws 
of  Taxation  (second  ed.,  1886),  83-85,  90-99,  109-112;  J.  R.  Tucker, 
Constitution  of  the  United  States,  457-508  (taxation);  G.  Bancroft,  Plea 
for  the  Constitution,  42-52  (paper  money);  C.  J.  Bullock,  74-78  (paper 
money);  J.  J.  Knox,  12-18  (paper  money);  C.  J.  Bullock,  Direct  Paxes 
under  the  Constitution,  in  Pol.  Sci.  Quar.,  XV  (1900),  217-239,  452-481 ; 
also  in  Yale  Revieiv,  IX,  439-451 ;  X,  6-29;  E.  J.  James,  The  Legal  Ten- 
der Decisions,  in  Pub.  Amer.  Econ.  Assn.,  Ill,  64-71  (also  Note,  p.  80) ; 
J.  B.  Thayer,  in  Harvard  Law  Review,  1,79;  H.  C.  Adams,  Finance, 
113-116  (budget). 

27.    Financial  Sections  of  the  Constitution. 

For  the  history  of  the  drafting  of  the  Constitution,  the  con- 
tending principles  which  clashed  in  the  convention,  and  the 
compromises  which  were  thereby  forced,  the  reader  must 
refer  to  special  treatises.  In  brief  there  were  two  plans  before 
the  convention  :  the  one,  narrow  in  its  scope,  proposed  to 
continue  the  general  form  of  government  established  under 
the  Articles  of  Confederation  but  to  give  Congress  power  to 
levy  duties  for  revenue  and  to  regulate  commerce ;  the  other 
was  more  far-reaching  and  looked  to  a  fundamental  change 
in  the  very  principle  of  the  federal  organization  by  the  substi- 
tution of  centralized  power  for  a  confederacy.  Apart  from 
differences  of  opinion   resulting   from  the  study  of  political 

60 


§27]  Financial  Sections.  61 

philosophy,  different  practical  interests  had  to  be  reconciled,  — 
the  large  States  as  against  the  small  States ;  the  States  with 
a  free  population  as  against  the  States  with  slaves ;  and  com- 
mercial States  as  against  those  with  little  or  no  foreign  inter- 
course. Many  of  the  conclusions  reached  were  therefore  the 
result  of  compromises  rather  than  the  expression  of  clear-cut 
and  definite  conviction  as  to  the  superior  merit  of  the 
proposition  involved. 

Public  finance  in  the  Constitution,  which  became  the  funda- 
mental law  of  the  nation  in  1 789,  is  especially  provided  for  in 
the  clauses  governing  taxation,  loans,  coinage,  appropriations, 
and  accounts.  The  following  articles  deal  explicitly  with  these 
subjects  : 

Taxation :  "  The  Congress  shall  have  power  to  lay  and 
collect  taxes,  duties,  imposts,  and  excises,  to  pay  the  debts  and 
provide  for  the  common  defence  and  general  welfare  of  the 
United  States ;  but  all  duties,  imposts,  and  excises  shall  be 
uniform  throughout  the  United  States."    (Art.  I,  Sect.  8,  §  1.) 

"  No  capitation,  or  other  direct,  tax  shall  be  laid,  unless  in 
proportion  to  the  census  or  enumeration  hereinbefore  directed 
to  be  taken."      (Art.  I,  Sect.  9,  §  4.) 

"  No  tax  or  duty  shall  be  laid  on  articles  exported  from 
any  State."  (Art.  I,  Sect.  9,  §  5.)  "  Nor  shall  vessels  bound 
to  or  from  one  State  be  obliged  to  enter,  clear,  or  pay  duties 
in  another."     (§  6.) 

"  No  State  shall,  without  the  consent  of  the  Congress,  lay  any 
imposts  or  duties  on  imports  or  exports,  except  what  may  be 
absolutely  necessary  for  executing  its  inspection  laws ;  and 
the  net  produce  of  all  duties  and  imposts,  laid  by  any  State 
on  imports  or  exports  shall  be  for  the  use  of  the  treasury  of 
the  United  States ;  and  all  such  laws  shall  be  subject  to  the 
revision  and  control  of  the  Congress.  No  State  shall  without 
the  consent  of  Congress  lay  any  duty  of  tonnage."  (Art.  I, 
Sect.  10,  §  2.) 

Initiative  of  Revenue  Bills  :  "  All  bills  for  raising  revenue 
shall   originate    in   the    House   of  Representatives ;    but   the 


62  Provisions  of  the  Constitution.       [§28 

Senate  may  propose  or  concur  with  amendments,  as  on  other 
bills."     (Art.  I,  Sect.  7,  §  1.) 

Loans :  [The  Congress  shall  have  power]  "  to  borrow  money 
on  the  credit  of  the  United  States."      (Art.  I,  Sect.  8,  §  2.) 

Coinage :  [Congress  shall  have  power]  "  to  coin  money, 
regulate  the  value  thereof,  and  of  foreign  coin."  (Art.  I, 
Sect.  8,  §  5.) 

Indebtedness :  "  All  debts  contracted  and  engagements  en- 
tered into  before  the  adoption  of  this  Constitution  shall  be 
as  valid  against  the  United  States  under  this  Constitution  as 
under  the  Confederation."      (Art.  VI,  Sect.  1.) 

Appropriations :  "  No  money  shall  be  drawn  from  the 
treasury  but  in  consequence  of  appropriations  made  by  law." 
(Art.  I,  Sect.  9,  §  6.) 

[Congress  shall  have  power]  "  to  raise  and  support 
armies,  but  no  appropriation  of  money  to  that  use  shall  be 
for  a  longer  term  than  two  years."      (Art.  I,  Sect.  8,  §  12.) 

Accounts :  "  A  regular  statement  and  account  of  the 
receipts  and  expenditures  of  all  public  money  shall  be  pub- 
lished from  time  to  time."      (Art.  I,  Sect.  9,  §  6.) 

Restriction  on  States :  "  No  State  shall  coin  money ;  emit 
bills  of  credit;  make  anything  but  gold  and  silver  coin  a 
tender  in  payment  of  debts."      (Art.  I,  Sect.  10.) 

28.     Taxation. 

In  taxation  the  grant  of  federal  power  was  large,  —  so  large 
as  to  be  alarming  to  those  who  feared  the.  rule  of  a  central 
government.  Convinced  that  the  bestowal  of  power  to  secure 
revenue  must  be  more  generous  than  under  the  Articles  of 
Confederation,  it  was  agreed  that  taxes  might  be  collected 
from  the  people  without  intervention  of  State  or  local  officers. 
The  limitations  are  :  first,  that  all  duties,  imposts,  and  excises 
must  be  uniform  throughout  the  United  States ;  second,  that 
direct  taxes  shall  be  in  proportion  to  population ;  and,  third, 
that  no  export  duties  shall  be  imposed  by  Congress  or  by 
States.     The  reason   for    the  first  limitation  is  clear;    State 


§  28]  Taxation.  63 

jealousy  demanded  an  explicit  declaration  that  imports  and 
excises  should  not  vary  to  the  benefit  of  one  section  over 
against  another.  All  parts  of  the  country  were  to  be  placed 
upon  the  same  footing.  Unsuccessful  attempts  have  been 
made  to  interpret  the  word  "  uniform  "  as  referring  not  only 
to  territory  but  to  individuals :  so  that  for  example  in  the 
imposition  of  an  income  tax  no  exceptions  can  be  made  in 
favor  of  small  incomes,  and  no  variations  shall  be  admitted 
in  the  rate,  but  it  has  been  well  established  that  the  right  to 
tax  includes  the  right  to  make  individual  exemptions  or 
discriminations. 

The  second  limitation,  on  apportionment  of  direct  taxes, 
was  adopted  only  after  long  and  wearisome  debate.  The 
rule  of  the  Articles  of  Confederation  by  which  taxes  were 
imposed  upon  the  several  States  according  to  the  ascertained 
value  of  the  land  with  its  buildings  and  improvements  was  an 
effort  to  apportion  according  to  wealth ;  but  none  of  the 
States  ever  made  adequate  assessment  of  the  value  of  land, 
and  apparently  did  not  intend  to  do  their  duty  in  that  respect. 
The  defect  had  been  quickly  recognized,  but  when  it  was  pro- 
posed to  change  to  a  basis  of  population  a  new  complication 
arose,  because  part  of  the  States  were  slave-holding.  In  the 
convention  the  difference  of  interest  between  States  with 
many  slaves  and  those  with  few  or  none  was  tangled  with 
the  question  of  the  proper  basis  of  representation  in  the 
House  of  Representatives.  The  South  wished  to  keep  any 
advantage  of  numbers  and  yet  avoid  any  burden  of  taxation 
laid  on  a  basis  of  population.  A  compromise  was  finally 
reached  by  which  the  North  yielded  on  the  question  of  repre- 
sentation, the  South  on  that  of  taxation,  and  a  half-way  point 
was  found  in  the  so-called  federal  ratio  by  which  slaves 
counted  at  three-fifths  their  number,  both  for  representation 
and  for  direct  taxes.  The  result  was  that  slaves  helped  to 
increase  the  political  power  of  the  Southern  States. 

At  one  stage  of  the  debate,  in  the  hope  of  securing  common 
action,  it  was  proposed  that  all  taxation  including  every  branch 


64  Provisions  of  the  Constitution.        [§  28 

of  revenue,  indirect  as  well  as  direct,  should  be  apportioned 
by  population.  As  was  clearly  shown,  by  such  a  restriction 
Congress  would  be  embarrassed,  if  not  completely  blocked, 
in  raising  any  revenue  by  import  or  other  indirect  taxes,  and 
would  thus  be  driven  back  to  the  intolerable  system  of  requisi- 
tions upon  the  States ;  the  amendment  was  consequently 
abandoned.  As  a  fiscal  device  the  system  of  taxes  in  pro- 
portion to  numbers  has  slight  justification  ;  and  the  Constitu- 
tion seems  hardly  to  have  considered  the  probable  incidence 
of  taxation  thus  crudely  imposed.  With  a  more  even  dis- 
tribution of  property,  apportionment  according  to  population 
might  work  with  fairness  ;  but  property  does  not  accumulate 
in  any  such  proportion,  and  the  principle  would  have  worked 
grave  injustice  had  taxes  been  frequently  collected  in  this 
manner.  Even  Gouverneur  Morris,  who  proposed  the  restric- 
tion, afterwards  saw  the  disadvantages  which  might  arise  from 
it,  and,  before  the  convention  adjourned,  endeavored  without 
success  to  remove  the  difficulty.  The  acceptance  of  this 
illogical  method  of  distributing  direct  taxes  was  probably  due 
to  a  belief  that  such  taxes  would  rarely  be  levied,  and  the 
previous  failure  of  requisitions  —  direct  taxes  under  another 
name  —  had  a  powerful  influence  in  persuading  the  unpreju- 
diced to  favor  indirect  taxes  as  a  better  means  of  supporting 
public  credit. 

The  restriction  that  capitation  and  direct  taxes  should  not 
be  laid  until  a  census  was  taken  was  inserted  at  the  insistence 
of  the  Southern  delegates,  so  as  to  prevent  the  immediate 
imposition  of  a  tax  which  might  bear  unfairly  upon  slave- 
holders. 

The  denial  of  power  to  tax  exports  was  the  work  of  the 
important  States  of  the  seaboard,  under  the  leadership  of 
South  Carolina.  There  were  many  leaders  in  the  convention 
who  rightly  urged  that  the  financial  powers  of  the  government 
would  not  be  complete  without  the  power  to  tax  exports  as 
well  as  imports ;  Washington,  Madison,  Wilson,  Gouverneur 
Morris,  and  Dickinson  all  favored  it,  but  the  South  especially 


§  28]  Taxation.  65 

stood  in  opposition.  Tobacco,  rice,  and  indigo,  staple  prod- 
ucts of  the  Southern  States,  furnished  nearly  one-third  of  the 
exports ;  South  Carolina  declared  that  her  exports  in  a  single 
year  were  ^600,000 ;  and  her  delegates  would  not  assent  to 
the  possibility  of  a  system  of  taxation  which  might  prove  a 
discriminating  burden  upon  the  products  of  her  soil.  The 
protection  of  the  commercial  interests  of  the  Southern  States 
also  appears  in  the  limitation  of  the  tax  on  slaves  (who  might 
be  imported  up  to  1808)  to  a  maximum  of  ten  dollars  for 
each  person. 

Notwithstanding  the  number  of  explicit  constitutional  limita- 
tions on  taxation,  the  actual  workings  of  the  tax  system  have 
been  much  affected  by  what  the  Constitution  does  not  say. 
Taxes  must  be  laid  and  collected  for  "  the  common  defense 
and  general  welfare,"  but  it  is  difficult  to  define  what  is  a 
public  purpose.  Since  the  federal  tax  laws  seldom  state  the 
particular  objects  for  which  the  revenue  shall  be  used,  it  is 
useless  to  make  constitutional  objection  to  a  particular  tax, 
on  the  ground  that  it  may  furnish  means  for  a  later  improper 
expenditure. 

The  definition  of  the  term  "direct  tax"  has  proved  trouble- 
some ;  it  is  probable  that  the  makers  of  the  Constitution 
intended  to  limit  its  application  to  polls  and  land  ;  yet,  though 
the  Supreme  Court  has  had  occasion  to  deliver  several  im- 
portant decisions  bearing  upon  this  subject,  no  satisfactory 
interpretation  has  been  reached.  The  question  later  becomes 
of  great  practical  importance  in  determining  the  right  of  Con- 
gress to  impose  an  income  tax. 

The  constitutional  restrictions  on  the  States  in  regard  to 
taxation  were  designed  not  only  to  strengthen  the  resources 
of  the  federal  treasury,  but  also  to  fasten  more  firmly  in 
the  hands  of  the  general  government  all  the  powers  which 
might  indirectly  affect  commerce  ;  hence  State  tariffs  either 
on  imports  or  exports  are  expressly  forbidden,  because 
they  disturb  the  uniformity  of  commercial  regulations  with 
foreign   countries.     This   clause    has   shorn    the    revenue    re- 

5 


66  Provisions  of  the  Constitution.        [§  28 

sources  of  the  States  more  than  was  anticipated ;  for,  though 
the  States  retain  concurrent  powers  of  taxation  on  all  objects 
of  taxation  except  imports,  new  conditions  of  commerce  have 
given  to  the  federal  government  a  growing  advantage.  A 
century  ago  production  and  trade  were  limited  to  a  narrow 
circle  by  lack  of  transportation ;  under  the  present  conditions 
of  commercial  exchange,  extending  across  a  continent,  the 
opportunity  of  the  State  to  lay  excise  taxes  either  on  manu- 
factures or  sales  is  seriously  restricted,  and  thus  this  important 
source  of  revenue  is  practically  monopolized  by  the  general 
government.  In  like  measure  the  constitutional  provision  in 
regard  to  federal  control  of  interstate  commerce  necessarily 
checks  the  State  in  taxing  goods  brought  from  other  States  to 
be  used  within  its  own  border.  Again,  the  Constitution  pro- 
vides that  the  citizens  of  each  State  shall  be  entitled  "  to  all 
the  privileges  and  immunities  of  the  citizens  of  the  several 
States " :  this  effectually  prevents  States  from  laying  dis- 
criminating taxes  upon  the  citizens  of  sister  commonwealths. 
Corporations,  however,  are  not  regarded  as  citizens  so  far  as 
this  clause  is  concerned,  and  consequently  their  status  is  an 
exception  to  the  rule  of  equal  privileges. 

The  question  of  the  initiation  of  revenue  bills  gave  rise  to 
one  of  the  great  compromises  of  the  Constitution.  It  was 
agreed  that  the  smaller  States  should  have  equal  representa- 
tion in  the  Senate  on  condition  that  the  House,  where  the 
large  States  were  the  more  powerful,  possess  the  exclusive 
right  to  originate  revenue  bills.  The  wisdom  of  the  clause 
was  gravely  questioned  by  many  of  the  leading  men  in  the 
convention  ;  once  it  was  thrown  out  of  the  draft ;  but  it  was 
again  inserted  as  the  quid  pro  quo  for  the  exclusive  right  to 
the  Senate  to  ratify  treaties,  to  judge  impeachments,  and  to 
confirm  appointments.  The  limitation  is  not  complete,  inas- 
much as  the  Senate  can  propose  or  concur  with  amendments 
as  on  other  bills ;  and,  as  will  be  shown  later,  the  Senate  in 
practice  has  gone  much  farther  in  encroachments  on  the  pre- 
rogative of  the  House.     In  limiting  the  initiative  of  revenue 


§  29]  Borrowing  ;   Bills  of  Credit.  67 

bills  to  the  House  of  Representatives  an  analogy  may  be  found 
in  the  English  Parliamentary  custom  which  provides  that  all 
money  bills  shall  originate  with  the  House  of  Commons.  The 
term  "  to  raise  revenue,"  however,  is  not  construed  as  including 
post-office  bills,  mint  bills,  or  bills  relating  to  the  sale  of  pub- 
lic lands. 

29.    Borrowing ;  Bills  of  Credit. 

The  borrowing  power  of  the  national  government  is  well- 
nigh  complete ;  there  is  no  limitation  as  to  time,  manner, 
place,  amount,  security,  payment,  or  interest.  A  broad  inter- 
pretation gives  Congress  the  right  to  establish  a  bank,  inas- 
much as  the  credit  of  the  government  is  thereby  strengthened 
and  its  borrowing  powers  enlarged.  During  the  Civil  War 
the  question  was  raised  whether  Congress  was  given  the  right 
to  make  a  forced  loan  through  the  emissions  of  bills  of  credit. 
Full  discussion  of  this  point  belongs  to  a  later  period  ;  but  so 
frequent  and  insistent  has  been  the  reference  to  the  intentions 
of  the  fathers  of  the  Constitution  that  it  is  necessary  here  to 
quote  an  extract  from  the  debate  on  the  proposition  to  strike 
out  "  and  emit  bills  on  the  credit  of  the  United  States  "  :  — 

Mr.  Gouverneur  Morris.  —  If  the  United  States  had  credit,  such 
bills  would  be  unnecessary ,  if  they  had  not,  unjust  and  useless. 

Mr.  Madison.  —  Will  it  not  be  sufficient  to  prohibit  the  making  them 
a  tender?  This  will  remove  the  temptation  to  emit  them  with  unjust 
views.  And  promissory  notes,  in  that  shape,  may  in  some  emergencies 
be  best. 

Mr.  Morris. —  Striking  out  the  words  will  leave  room  still  for  notes 
of  a  responsible  minister,  which  will  do  all  the  good  without  the  mischief. 
The  moneyed  interest  will  oppose  the  plan  of  government,  if  paper  emis- 
sions be  not  prohibited. 

Mr.  Gorham  was  for  striking  out  without  inserting  any  prohibition. 
If  the  words  stand,  they  may  suggest  and  lead  to  the  measure. 

Mr.  Mason  had  doubts  on  the  subject.  Congress,  he  thought,  would 
not  have  the  power  unless  it  were  expressed.  Though  he  had  a  mortal 
hatred  to  paper  money,  yet,  as  he  could  not  foresee  all  emergencies,  he 
was  unwilling  to  tie  the  hands  of  the  legislature.  He  observed  that  the 
late  war  could  not  have  been  carried  on  had  such  a  prohibition  existed. 

Mr.  Gorham.  —  The  power,  as  far  as  it  will  be  necessary  or  safe,  is 
involved  in  that  of  borrowing. 


68  Provisions  of  the  Constitution.        [§29 

Mr.  Mercer  was  a  friend  to  paper  money,  though  in  the  present 
state  and  temper  of  America  he  should  neither  propose  nor  approve  of 
such  a  measure.  He  was  consequently  opposed  to  a  prohibition  of  it 
altogether.  It  will  stamp  suspicion  on  the  government  to  deny  it  a  dis- 
cretion on  this  point.  It  was  impolitic,  also,  to  excite  the  opposition  of 
all  those  who  were  friends  to  paper  money.  The  people  of  property 
would  be  sure  to  be  on  the  side  of  the  plan,  and  it  was  impolitic  to  pur- 
chase their  further  attachment  with  the  loss  of  the  opposite  class  of  citi- 
zens. 

Mr.  Ellsworth  thought  this  a  favorable  moment  to  shut  and  bar 
the  door  against  paper  money.  The  mischiefs  of  the  various  experi- 
ments which  had  been  made  were  now  fresh  in  the  public  mind,  and  had 
excited  the  disgust  of  all  the  respectable  part  of  America.  By  withhold- 
ing the  power  from  the  new  government,  more  friends  of  influence  would 
be  gained  to  it  than  by  almost  anything  else.  Paper  money  can  in  no 
case  be  necessary.  Give  the  government  credit,  and  other  resources  will 
offer.     The  power  may  do  harm,  never  good. 

Mr.  Randolph,  notwithstanding  his  antipathy  to  paper  money,  could 
not  agree  to  strike  out  the  words,  as  he  could  not  foresee  all  the  occa- 
sions that  might  arise. 

Mr.  Wilson.  —  It  will  have  a  most  salutary  influence  on  the  credit 
of  the  United  States  to  remove  the  possibility  of  paper  money.  This 
expedient  can  never  succeed  whilst  its  mischiefs  are  remembered.  And, 
as  long  as  it  can  be  resorted  to,  it  will  be  a  bar  to  other  resources. 

Mr.  Butler  remarked  that  paper  was  a  legal  tender  in  no  country 
in  Europe.  He  was  urgent  for  disarming  the  government  of  such  a 
power. 

Mr.  Mason  was  still  averse  to  tying  the  hands  of  the  legislature  alto- 
gether. If  there  was  no  example  in  Europe,  as  just  remarked,  it  might 
be  observed,  on  the  other  side,  that  there  was  none  in  which  the  govern- 
ment was  restrained  on  this  head. 

Mr.  Read  thought  the  words,  if  not  struck  out,  would  be  as  alarm- 
ing as  the  mark  of  the  beast  in  Revelation. 

Mr.  Langdon  had  rather  reject  the  whole  plan  than  retain  the  three 
words  "  and  emit  bills." 

On  the  motion  for  striking  out:  New  Hampshire,  Massachusetts, 
Connecticut,  Pennsylvania,  Delaware,  Virginia,  North  Carolina,  South 
Carolina,  Georgia,  —  aye,  9;  New  Jersey,  Maryland,  —  no,  2. 

Note  by  Mr.  Madison.  —  This  vote  in  the  affirmative  by  Virginia 
was  occasioned  by  the  acquiescence  of  Mr.  Madison,  who  became  satis- 
fied that  striking  out  the  words  would  not  disable  the  government  from 
the  use  of  public  notes,  as  far  as  they  could  be  safe  and  proper,  and 
would  only  cut  off  the  pretext  for  a  paper  currency,  and  particularly  for 
making  the  bills  a  tender,  either  for  public  or  private  debts.1 

1  Madison  Papers,  vol.  iii.,  pp.  1343-1346. 


§  29]  Borrowing  ;   Bills  of  Credit.  69 

The  question  was  thus  left  in  such  a  doubtful  form  that  it 
is  difficult  now  to  decide  whether  the  convention  intended 
to  deny  absolutely  to  Congress  the  right  to  emit  bills  of  credit 
under  any  circumstances  whatever.  Mr.  Bancroft,  an  authority 
on  the  history  of  the  Constitution,  declares  that  the  refusal  is 
so  clear  that  according  to  all  rules  by  which  public  documents 
are  interpreted  the  prohibition  should  not  even  be  treated  as 
questionable ;  he  cites  in  proof  the  statement  just  quoted 
from  the  debates  and  makes  a  striking  argument  in  support 
of  this  conclusion.  A  possible  element  of  doubt  is  raised 
when  it  is  remembered  that  the  discussion  in  the  convention 
was  over  the  clause  making  a  positive  grant  of  power  to  Con- 
gress rather  than  over  an  express  denial.  Hamilton,  who  took 
a  leading  part  in  the  agitation  for  a  new  Constitution,  only 
three  years  later  in  1790,  appears  to  have  felt  that  the  prohi- 
bition was  not  literally  complete.  "  The  emitting  of  paper 
money  by  the  authority  of  government  is  wisely  prohibited  to 
the  individual  States  by  the  national  Constitution  ;  and  the 
spirit  of  that  prohibition  ought  not  to  be  disregarded  by  the 
government  of  the  United  States.  The  wisdom  of  the  Gov- 
ernment will  be  shown  in  never  trusting  itself  with  the  use  of 
so  seducing  and  dangerous  an  expedient."  It  is  also  difficult 
to  believe  that  the  issue  of  treasury  notes  in  181 2,  although 
not  payable  on  demand  or  legal  tender,  would  have  been  so 
easily  accomplished  if  the  framers  of  the  Constitution  who 
were  still  influential  in  public  affairs  had  been  confident  in 
their  conviction  that  the  Constitution  had  absolutely  taken 
away  the  right  of  emission  of  bills  of  credit.  At  any  rate,  the 
subsequent  action  of  Congress  from  181 2  to  i860  in  repeatedly 
authorizing  bills  of  credit,  and  from  1862  to  the  present  day 
in  emitting  legal  tenders,  affords  a  striking  example  of  the 
ease  with  which  the  Constitution  has  been  adjusted,  if  not 
strained,  in  order  to  meet  real  or  fanciful  emergencies. 

Of  more  immediate  importance  at  the  time  was  the  consti- 
tutional clause  forbidding  the  States  to  emit  bills  of  credit. 
It  was  first  proposed   that  State  issues  should   depend  upon 


jo  Provisions  of  the  Constitution.        [§  30 

national  consent,  and  fear  was  expressed  that  an  absolute  pro- 
hibition in  the  Constitution  would  arouse  serious  antagonism. 
The  prohibition,  however,  was  carried  by  eight  States,  Virginia 
alone  voting  in  the  negative  and  Maryland  divided. 

30.     Coinage. 

The  question  of  coinage  belongs  more  properly  to  a  special 
treatise  on  money,  but  in  recent  years  an  interpretation  has 
been  given  to  the  term  which  makes  it  necessary  to  refer 
briefly  to  its  meaning.  The  word  is  generally  applied  to  the 
making  of  gold,  silver,  or  other  metallic  pieces  of  money. 
Advocates  of  government  paper  money,  such  as  the  Greenback 
Party,  have  defined  "to  coin"  as  "to  make"  or  "to  fabri- 
cate "  ;  and  hence  assert  that  the  clause  in  question  gives  the 
United  States  power  specifically  to  issue  and  emit  bills  of 
credit  as  money.  Since  there  was  but  little  specie  in  the 
country  in  1787,  it  is  absurd  to  suppose  —  so  the  argument 
runs  —  that  a  power,  the  granting  of  which  has  for  its 
very  purpose  the  raising  and  supporting  of  an  army, 
creating  and  maintaining  a  navy,  etc.,  could  be  confined 
to  the  right  of  simply  minting  metallic  coins.  Two  con- 
temporary authorities  have  been  cited :  Franklin,  who  ad- 
vocated the  coinage  of  land  into  credit,  and  credit  into  coin 
called  paper  money  ;  and  Jefferson,  who  alluded  to  the  use  of 
treasury  certificates  as  coining  and  striking  money.  Although 
the  term  may  have  been  loosely  used  in  colonial  times,  the 
federal  courts  for  a  long  period  in  their  interpretation  restricted 
the  right  of  coinage  to  metallic  forms  of  money.  In  later 
years,  in  the  endeavor  to  justify  the  legal-tender  notes  and  to 
give  the  general  government  complete  supremacy  over  the 
currency  of  the  whole  country,  judicial  authority  has  accepted 
the  broader  construction.  Thus  Justice  Strong  in  Shollen- 
berger  v.  Brinton  said,  "  I  cannot  think  it  a  latitudinarian  con- 
struction of  the  Constitution  to  regard  the  phrase  '  coin  money 
and  regulate  its  value '  as  synonymous  with  making  money  or 
supplying  a  currency.  ...  If  coining  money  and  regulating 


§  3°]  Coinage.  71 

its  value  means  no  more  than  putting  a  stamp  on  pieces  of 
metal,  and  declaring  what  they  are  worth,  it  is  no  power  over 
the  currency,  and  there  is  no  legalized  currency.  Stamping 
pieces  of  metal  does  not  make  them  money.  Coining  money 
therefore,  and  regulating  its  value,  means  something  more 
than  making  coins  out  of  metallic  substances.  .  .  .  When  the 
Constitution  was  adopted  the  great  thing  sought  in  regard  to 
the  currency  was  uniformity  of  value.  This  could  not  be  se- 
cured by  local  legislation.  Hence  the  restrictions  on  the 
States,  and  the  grant  to  the  federal  legislature  without  any  ex- 
press restriction.  An  exclusively  metallic  currency  was  not 
suited  to  the  exigencies  of  a  civilized  and  commercial  age. 
It  had  proved  inadequate  during  the  Revolutionary  War,  and 
could  not  meet  the  wants  of  a  rapidly  extending  trade."  * 

Again,  from  the  power  to  regulate  commerce  ingenious 
efforts  have  been  made  to  justify  federal  power  over  the  cur- 
rency. "  Of  all  that  goes  to  make  up  the  sum,"  writes  Hare, 
"  or  contributes  to  the  successful  prosecution  of  commerce, 
nothing  is  so  important  as  the  circulating  medium."  And 
Webster  declared,  "  The  regulation  of  money  is  not  so  much 
an  inference  from  the  commercial  power  conferred  on  Con- 
gress as  it  is  a  part  of  it.  Money  is  one  of  the  things  without 
which  in  modern  times  we  can  form  no  idea  of  commerce." 

The  word  "money"  in  connection  with  coinage  has  also 
been  the  subject  of  controversy,  in  that  it  includes  both  silver 
and  gold.  If  this  be  the  constitutional  intention,  it  has  been 
argued,  quoting  the  words  of  Webster,  "  Neither  Congress  nor 
any  other  authority  can  legally  demonetize  either  silver  or 
gold.  The  command  to  Congress  is  to  coin  money,  not  to 
destroy  it ;  to  create  legal-tender  money  for  the  use  of  the 
people  ;  and  the  grant  of  authority  to  create  money  cannot  be 
construed  to  mean  authority  to  destroy  money."  Bimetallists 
and  silver  advocates  in  late  discussions  have  made  frequent 
reference  to  this  interpretation. 

1  Justice  Strong,  52  Pa.,  67. 


J2  Provisions  of  the  Constitution.        [§31 

31.    Appropriations. 

While  there  may  be  ambiguities  in  the  Constitution  in 
regard  to  the  getting  of  revenue,  there  has  been  still  more 
perplexity  in  interpreting  its  meaning  as  to  the  spending  of 
public  revenues.  No  express  checks  were  placed  in  the 
Constitution  upon  the  methods  of  appropriations,  except 
those  already  quoted.  As  to  the  range  or  scope  of  appro- 
priations there  have  been  two  widely  different  schools  of 
interpretation,  depending  in  turn  upon  different  convictions 
in  regard  to  the  powers  entrusted  to  Congress  by  the  Con- 
stitution. Congress  is  given  power  to  "  pay  the  debts  and 
provide  for  the  common  defense  and  general  welfare  of  the 
United  States."  Over  the  meaning  of  the  latter  clause  there 
has  been  a  searching  and  at  times  bitter  controversy :  on 
one  side  are  the  strict  constructionists,  who  limit  the  power  of 
Congress  to  those  expressly  enumerated  ;  and,  on  the  other, 
the  broad  constructionists,  who  justify  congressional  action 
over  a  wide  range  of  activities  in  regard  to  which  the  Consti- 
tution is  silent.  Particularly  has  there  been  a  struggle  over 
the  constitutionality  of  appropriations  for  education  and  in- 
ternal improvements,  but  for  a  full  discussion  of  these  subjects 
the  reader  must  be  referred  to  treatises  on  the  constitutional 
law  of  the  United  States.  At  one  stage  of  the  debate  on  the 
Constitution,  it  was  determined  to  limit  the  right  of  initiating 
appropriation  bills  to  the  House  of  Representatives,  as  in  the 
case  of  revenue  bills,  but  no  restriction  appeared  in  the 
final  draft. 

In  the  general  division  of  powers  between  the  executive 
and  legislative  branches  of  the  government  there  was  a  jeal- 
ous safeguarding  of  democracy ;  the  president  as  executive 
is  given  little  power  in  the  making  of  the  budget ;  he  is 
practically  confined  to  drawing  up  formal  estimates  of  receipts 
and  expenditures,  based  upon  existing  legislation ;  and  his 
responsibility  and  power  end  there,  except  that  he  retains 
the  power  of  veto  of  revenue  and  appropriation  bills.     As  this 


§  32]     Objections  to  the  Financial  Powers.   73 

veto  power  must  be  applied  to  the  bill  as  a  whole,  and  not  to 
individual  items,  the  power  over  appropriation  bills  is  rarely 
exercised  for  fear  of  crippling  some  important  service  of  the 
government ;  and  in  the  case  of  revenue  bills  it  would  not  be 
exercised  unless  the  executive  and  legislature  were  in  radical 
opposition  over  the  policy  of  framing  a  tariff. 

32.    Popular  Objections  to  the  Financial  Powers. 

When  the  draft  of  the  Constitution  was  finally  placed  before 
the  people  for  ratification,  there  was  a  most  active  discussion, 
at  first  in  pamphlets,  letters,  and  newspapers,  and  then  in  the 
State  conventions.  Dissenting  critics  found  defects  in  every 
section.  The  substance  of  the  opposition  was  that  the  new 
form  of  government  would  lead  to  centralized  power,  mon- 
archy, and  tyranny.  In  the  first  place  attention  was  called  to 
the  fact  that  the  condition  of  the  country  was  not  so  bad  as 
people  supposed  ;  State  indebtedness  had  already  been  much 
reduced  and  there  were  indications  of  returning  national 
credit ;  important  aid  was  to  be  expected  from  the  sale  of 
the  lands  in  the  West ;  and  it  was  loudly  asserted  that  this 
satisfactory  progress  in  the  restoration  of  public  credit  would 
be  stopped  if  a  federal  system  were  put  in  operation,  entailing 
an  increase  in  expenses. 

The  exclusive  grant  of  import  duties  to  Congress  in  particu- 
lar was  denounced  as  depriving  the  States  of  resources  abso- 
lutely necessary  for  the  integrity  of  their  own  individual  credit, 
both  for  the  support  of  internal  government  and  the  liquida- 
tion of  the  State  debts.  Most  abhorrent  of  all  was  the  grant 
of  internal  taxation  to  the  federal  government.  Citizens  were 
solemnly  asked  what  would  be  their  reflections  when  the  tax- 
master  thundered  at  their  doors  for  the  duty  on  that  light 
which  is  the  bounty  of  heaven,  when  a  host  of  rapacious  col- 
lectors invade  the  land,  who  will  "  wrest  from  you  the  hard 
product  of  your  industry,  turn  out  your  children  from  their 
dwellings,  perhaps  commit  your  bodies  to  a  jail."  Well  might 
a  contemporary  writer  exclaim,  "This  is  the  mere  frenzy  of 


74  Provisions  of  the  Constitution.        [§32 

declaration,  the  ridiculous  conjuration  of  spectres  and  hob- 
goblins." Nevertheless  these  fears  were  sincere ;  and  their 
existence  must  be  taken  into  account  by  the  student  of 
American  finance.  Less  creditable  was  the  desire  on  the  part 
of  the  less  well-to-do  in  the  community,  the  unsuccessful  in 
business  and  the  debtor  class,  to  perpetuate  unsettled  condi- 
tions in  the  hope  that  contracts  and  the  payment  of  debts 
might  not  be  too  strictly  enforced.  "  The  same  causes," 
observes  Curtis,  "  which  led  individuals  to  take  to  legislation 
for  irregular  relief  from  the  burden  of  their  private  contracts, 
led  them  also  to  regard  public  obligations  with  similar  impa- 
tience." By  vigorous  pleading  the  cause  of  the  Constitution 
triumphed,  and  in  April,  1789,  the  new  government  was 
inaugurated. 


CHAPTER   IV. 

ESTABLISHMENT   OF   A   NATIONAL   SYSTEM. 
33.    References. 

Bibliographies:  Bogart  and  Rawles,  15-19;  Channing  and  Hart, 
331 ;  W.  MacDonald,  Select  Documents,  47,  61. 

Tariff:  (i)  Sources,  Hamilton's  Report  on  Manufactures,  Ameri- 
can State  Papers,  Finance,  I,  123-146;  also  Finance  Reports,  I, 
7S-132;  also  Works,  III;  also  W.  MacDonald,  Select  Documents, 
9S-112;  also  State  Papers  on  the  Tariff  (Taussig  ed.),  1-107 ;  E. 
Young,  Customs  Tariff  Legislation,  iv-xvi  (debates  and  votes)  ;  Stat- 
utes, I,  24  ;  Annals  of  Congress,  1789-1791,  I,  106,  et  seq. ;  or  Benton's 
Abridgment,  I,  24-44,  57~65.  71-84.  (ii)  Special:  Bolles,  II,  73-102; 
O.  L.  Elliott,  The  Tariff  Controversy  (Leland  Stanford,  Jr.,  Univ.  Pub.), 
67-130  (summary  of  debates) ;  U.  Rabbeno,  American  Commercial  Policy, 
111-145  ;  W.  Hill,  Early  Stages  of  the  Tariff  Policy,  in  Pub.  Amer.  Econ. 
Assn.,  VIII,  107-132;  W.  Hill,  Protective  Purpose  of  the  Tariff  Act  of 
1789,  in  Journal  of  Political  Economy,  II,  54-77  ;  H.  C.  Adams,  Taxation 
in  the  U.  S.  (J.  H.  U.  Studies),  6-30;  F.  W.  Taussig,  ch.  ii.  (iii)  Gen- 
eral: H.  C.  Lodge,  Hamilton,  108-116;  W.  G.  Sumner,  Hamilton, 
172-183;  J.  T.  Morse,  Life  of  Hamilton,  I,  357-369;  McMaster,  I, 
544-550;  Schouler,  I,  86-92;  R.  Hildreth,  IV,  65-101  ;  J.  G.  Blaine, 
T'centy  Years  in  Congress,  I,  182-1S9;  H.  von  Hoist,  Constitutional  His- 
tory of  the  U.  S.,  I,  94-97;  Stanwood,  I,  72-1 10. 

Debt:  (i)  Sources,  Hamilton's  First  Report  on  Public  Credit  (Jan.  9, 
1790),  American  State  Papers,  Finance,  I,  15-37;  also  Finance  Reports,  I, 
3-53;  also  Annals  of  Congress,  1789-1791,  II,  2041-2074;  also  W.  Mac- 
Donald, Select  Documents,  46-58 ;  also  Elliot,  Funding  System,  23 ;  also 
Works  (ed.  1850),  III,  or  (Lodge  ed.)  II;  Second  Report  (Dec.  13,  1790), 
American  State  Papers,  Finance,  I,  64-67  ;  also  Annals  of  Congress,  1789- 
1791,  II,  2074-2082  ;  also  W.  MacDonald,  Select  Documents,  61-66.  Report 
of  January,  1795,  'n  American  State  Papers,  Finance,  I,  320-346;  also  Fi- 
nance Reports,  I,  157-215;  also  J.  Elliot,  Funding  System,  345.  (ii) 
Debates:  Annals  of  Congress,  1789-1791,  I,  1 131-1141  et  seq.,  II;  or 
Benton's  Abridgment,  I,  182-184,  190-201,  211-228.  (iii)  Loans  :  Bayley, 
299-316;  Statutes,  I,  138,  178;  or  Dunbar,  10-22.  (iv)  Special:  A. 
Gallatin,  Writings,  III,  121-149;  Bolles,  II,  22-41  ;  J.  W.  Kearny, 
Sketch  of  American  Pittances,  1-44 ;  J.  S.  Landon,  Constitutional  History 
of  the  U.  S.,  103-108;  H.  C.  Adams,  Public  Debt,  161-166,  226;  C.  F. 
Dunbar,  Some  Precedents  followed  by  Hamilton,  in   Quar.  Jour.  Econ., 

IS 


yd      Establishment  of  National  System.     [§  34 

III,  32-45.  (v)  General:  W.  G.  Sumner,  Hamilton,  144-162;  H.  C. 
Lodge,  Hamilton,  88-96,  117-131  ;  f .  T.  Morse,  Life  of  Hamilton,  I,  287- 
332;  J.  P.  Gordy,  Political  Parties,  I,  1 18-129;  R.  Hildreth,  IV,  152-173, 
206-215;  McMaster,  I,  567-593;  tichouler,  I,  130-142. 

Treasury  Department:  Annals  of  Congress,  1789-1791,  I,  400;  or 
Benton's  Abridgment,  I,  90;  Statutes,  I,  65;  or  Dunbar,  7;  Bolles,  II, 
3-21;  H.  C.  Adams,  Finance,  1 93-20 1 ;  H.  C.  Lodge,  Hamilton,  84-99; 
J.  1.  Morse,  Lije  oj  Hamilton,  1,  276-286;  R.  Hildreth,  IV,  152-173, 
206-215,  275;  A.  B.  Hart,  Handbook  of  the  History  of  the  U.  S.,  100 
(references,  especially  legal  and  constitutional). 

34.     Economic  Conditions  in  1789. 

Before  entering  upon  an  account  of  the  financial  measures 
of  the  new  government  a  brief  estimate  should  be  made  of  the 
economic  conditions  of  the  country.  The  population  in  1790 
was  nearly  4,000,000,  of  which  about  one-sixth  was  colored, 
for  the  most  part  slaves.  It  was  scattered  as  a  fringe  along 
the  Atlantic  seaboard  from  the  south  of  Georgia  to  the  north 
of  Maine ;  4n  no  latitude  did  it  extend  into  the  interior  as 
far  as  500  miles,  —  Albany  was  a  frontier  town  and  Pitts- 
burgh a  pioneer  settlement.  The  population  was  still  largely 
rural ;  there  were  but  six  cities  of  7500  or  more  inhabitants, 
and  the  largest  of  these,  New  York,  had  only  33,000  people. 
Work  and  industry  were  the  rule  of  life  throughout  the  country. 
Agriculture  busied  nine  families  out  of  ten ;  land  was  cheap 
and  bought  on  easy  credit,  for  there  were  unlimited  unsettled 
tracts  stretching  out  to  the  West,  partly  in  State  lands,  partly 
in  the  national  domain.  The  value  of  property  employed 
in  agriculture  was  far  greater  than  that  devoted  to  manufact- 
ures or  commerce.  Excepting  the  slave  plantations  of  the 
South,  the  farm-holdings  were  small,  and  the  cultivation  of 
each  was  carried  on  by  members  of  the  family  with  little  hired 
labor.  This  developed  throughout  the  North  a  general  equality 
of  political  and  social  interests,  if  not  of  economic  welfare. 

Little  change  had  come  about  in  agricultural  products  since 
the  colonial  period.  In  the  South,  particularly  in  Georgia 
and  the  Carolinas,  rice  of  a  superior  quality  was  raised  in 
large  quantities  and  formed  an  important  export ;  the  same 


§3+]      Economic  Conditions  in  1789.  yy 

States  also  produced  indigo  for  foreign  shipment  as  well  as 
for  domestic  use.  Tobacco  was  a  staple  product  throughout 
the  South  from  the  borders  of  Pennsylvania,  and  contributed 
a  generous  share  of  the  exports.  The  wheat  country  extended 
from  Virginia  to  the  western  end  of  New  England,  and  Amer- 
ican flour  had  an  established  reputation  in  the  West  Indies. 
Hemp  and  flax  were  raised  in  large  quantities  and  formed 
the  basis  of  important  manufactures.  Sheep  for  their  wool, 
cattle,  and  dairy  products  also  contributed  to  the  prosperity 
of  the  farmer.  The  export  of  salt  provisions  was  increasing. 
One  of  the  most  important  economic  resources  was  still  the 
forests ;  the  naval  supplies,  especially  the  tar,  pitch,  and  tur- 
pentine of  North  Carolina,  showed  no  exhaustion  ;  and  lumber 
and  timber  products  were  shipped  from  almost  all  the  States. 
The  clearing  of  the  forests  also  yielded  a  by-product  of  pot 
and  pearl  ashes,  the  sale  of  which  frequently  tided  the  pioneer 
over  the  earlier  months  of  privation. 

Although  agriculture  was  everywhere  the  principal  occupa- 
tion, the  rapid  expansion  of  settlement  caused  an  increasing 
demand  for  mechanics  to  build  the  houses,  barns,  and  work- 
shops ;  and  progress  was  making  in  some  lines  of  manufactures. 
The  growth  of  manufactures  was  especially  marked  after  the 
establishment  of  peace;  it  is  estimated  that  in  1787  the  im- 
portation of  manufactures  into  Massachusetts  was  only  one-half 
what  it  was  twenty  years  before.  As  soon  as  the  restrictions  of 
the  colonial  system  were  removed,  the  genius  of  the  American 
people  was  displayed  in  every  department  of  mechanical  activ- 
ity then  known,  —  witness  the  concise  description  given  by 
Hamilton  in  his  memorable  Report  on  Manufactures  in  1791, 
as  well  as  the  equally  authoritative  papers  of  Tench  Coxe,  in 
which  the  capacities  of  the  new  republic  are  defended  from 
the  aspersions  of  English  critics,  who  looked  for  an  easy  indus- 
trial subjugation,  even  if  political  supremacy  were  lost. 

Hamilton's  investigations  showed  that  there  were  seventeen 
distinct  branches  of  manufactures  which  were  carried  on  as  reg- 
ular trades  and  which  had  attained  a  considerable  degree  of 


yS      Establishment  of  National  System.     [§  34 

maturity.  Naturally  these  industries  were  closely  related  to  raw 
materials  which  the  country  then  afforded.  As  examples  may 
be  mentioned  the  following  :  manufactures  of  leather,  trunks, 
gloves,  parchment,  and  glue  ;  tanneries  were  numerous,  and 
foreign  competition  was  hardly  to  be  feared.  From  iron 
came  bar  and  sheet  iron,  rods  and  nails,  stoves,  household 
utensils,  and  implements  of  husbandry,  some  edged  tools  and 
hollow  ware.  There  was  an  abundant  supply  of  charcoal,  and 
iron  ore  of  almost  every  quality  was  abundant ;  one-half  of  the 
steel  consumed  in  the  United  States  was  home-made.  Of 
copper  there  were  manufactures  of  wire,  utensils  for  distillers, 
sugar  refiners,  and  brewers,  and  articles  for  household  use. 
Timber  was  the  raw  material  of  ships,  an  industry  which  had 
been  carried  to  a  high  point  of  perfection ;  there  were 
also  manufactures  of  cabinet  and  coopers'  wares.  From 
grain  came  flour,  and  also  the  important  products  of  ardent 
spirits  and  malt  liquors ;  the  rum  distilleries  of  Massachusetts 
were  dependent  for  their  raw  material  upon  the  molasses 
of  the  West  Indies,  but  in  the  Middle  States  stills  were  com- 
mon for  the  distillation  of  the  home  grains  and  fruits  ;  the 
largest  part  of  the  malt  liquors  consumed  was  the  product  of 
domestic  breweries.  From  flax  and  hemp  were  produced 
cables,  sail-cloth,  cordage,  and  twine,  and  though  the  manufact- 
ures were  not  large,  there  was  a  promising  beginning.  Man- 
ufactures of  paper  were  well  advanced,  and  entirely  "  adequate 
to  national  supply."  Different  manufactories  of  glass  were 
on  foot,  and  among  the  extensive  and  prosperous  domestic 
manufactures  were  those  of  refined  sugars  and  chocolates. 
In  addition  there  were  manufactures  of  bricks  and  pottery,  hats, 
oils  of  animals  and  seeds,  tin-ware,  carriages,  snuff,  starch, 
painters'  colors,  and  gunpowder.  The  variety  of  these  manu- 
factures was  no  more  striking  than  the  resourcefulness  in 
household  manufacture  ;  industry  as  a  whole  was  in  the  handi- 
craft stage  ;  cloths  of  wool,  cotton,  and  flax  were  thus  produced 
in  the  greatest  variety  ;  and  in  some  districts  from  two-thirds 
to  four-fifths  of  all  the  clothing  of  the  inhabitants  was  made  in 


§34]      Economic  Conditions  in  1789.  79 

the  home.  Woollen  manufactures  were  only  beginning  to  take 
a  place  as  a  factory  industry,  while  the  establishment  of  cotton 
mills  was  not  much  more  than  a  prophecy. 

The  means  of  internal  communication  were  undeveloped. 
The  Hudson  River  was  navigable  180  miles  from  the  ocean; 
the  Delaware  160;  and  the  Potomac  300  miles  above  the  falls 
near  Georgetown.  A  few  short  and  narrow  canals  had  been 
constructed.  Roads  were  everywhere  poor  and  transportation 
was  slow.  In  1790  there  were  but  75  post-offices;  mails  were 
infrequent,  as,  for  example,  but  three  per  week  between  New 
York  and  Boston,  requiring  in  the  best  of  weather  five  days  on 
the  road.  These  impediments  to  travel  and  intercourse  con- 
stituted an  important  element  of  friction  which  needs  to  be 
thoroughly  appreciated  as  a  partial  explanation  of  the  diffi- 
culty of  imposing  internal  taxes  which  would  be  acceptable  to 
the  whole  country. 

The  foreign  trade  can  be  described  more  definitely.  The 
Americans  had  long  enjoyed  an  economic  advantage  in  the 
building  of  ships,  and  the  enterprise  of  those  engaged  in  the 
fisheries  had  developed  a  skilful  and  daring  race  of  sailors. 
The  country  exported  its  surplus  products  of  agriculture  and 
forestry,  and  with  the  proceeds  bought  freely  of  luxuries  and 
manufactures  which  were  not  available  at  home.  The  value  of 
the  exports  at  this  time  was  about  $20,000,000,  and  that  of  the 
imports  probably  about  the  same.  Trade  returns  are,  however, 
too  incomplete  to  present  a  satisfactory  analysis  of  foreign 
commerce,  particularly  of  imports.  As  in  the  colonial  period, 
exports  to  the  West  Indies  provided  funds  with  which  to 
pay  for  imports  from  Europe. 

A  general  survey  of  economic  conditions  must  also  take  into 
account  the  growth  of  sectional  interests.  Slavery  in  the  South 
was  developing  an  economy  of  its  own  ;  New  York  and  the  New 
England  cities  were  strongly  inclined  to  commercial  undertak- 
ings ;  Pennsylvania  was  awakening  to  the  possibility  of  manu- 
factures. These  several  interests  were  to  furnish  storm-centres 
in  the  debates  and  govern  the  discussion  of  economic  questions. 


80      Establishment  of  National  System.      [§35 

35.     Tariff  Measures. 

Before  the  new  federal  government  was  fairly  organized  it 
had  to  settle  three  fundamentally  important  financial  questions  : 
a  revenue  must  be  secured ;  machinery  for  the  administration 
of  the  finances  must  be  established  ;  and  provision  must  be 
made  for  the  debt  already  accrued.  Of  these  problems  the 
most  immediate  was  the  provision  for  a  revenue,  and  on  April 
8,  1789,  even  before  the  inauguration  of  the  president  or  the 
establishment  of  a  treasury  department,  Madison  laid  the  sub- 
ject before  the  House  of  Representatives  in  the  form  of  a 
proposition  similar  in  most  respects  to  the  impost  measure  of 

1783. 

By  common  expectation  taxation  was  to  be  first  applied  to 
foreign  trade  ;  the  country  was  by  its  political  training  averse 
to  internal  taxation  ;  local  taxes  fell  largely  on  property ;  export 
taxes  were  prohibited  ;  and  direct  taxes  could  not  be  laid  until 
an  enumeration  of  the  population  had  been  finished.  The 
situation  admitted  of  no  delay ;  the  spring  importations  would 
shortly  reach  port;  and  therefore  Madison  proposed  "such 
articles  of  requisition  only  as  are  likely  to  occasion  the  least 
difficulty."  The  articles  upon  which  specific  duties  were  to  be 
laid  were  eight  in  number :  rum  and  spirituous  liquors, 
molasses,  wines,  tea,  pepper,  sugar,  cocoa,  and  coffee.  The 
advantage  which  might  have  come  from  taxing  the  spring  im- 
portations was,  however,  soon  lost,  through  differences  of 
opinion  over  details  of  the  impost ;  then  as  ever  afterwards  it 
was  difficult  to  reconcile  taxation  to  the  conflicting  economic 
interests  of  different  sections  of  the  country. 

Hopes  were  early  expressed  that  the  measure  might  be 
adequate  to  the  situation  of  the  country  in  its  aid  to  agricult- 
ure, manufactures,  and  commerce  ;  in  other  words,  that  taxation 
should  have  other  than  fiscal  objects.  It  was  urged  that  legis- 
lation should  take  into  account  changes  of  conditions  since 
1783,  and  special  consideration  was  asked  for  certain  indus- 
tries.    The  result  of  divided  counsels  was  a  debate  of  seven 


§35]  Tariff  Measures.  81 

weeks,  devoted  chiefly  to  the  rates  to  be  imposed  upon  mo- 
lasses, distilled  spirits,  iron  and  steel,  nails,  candles,  hemp, 
and  cotton.  The  North  advocated  a  high  duty  on  rum,  a 
prosperous  manufacture  which  ought  to  be  protected  against 
Jamaica  distilleries ;  while  it  objected  to  a  high  duty  upon 
molasses,  which  was  largely  consumed  as  an  article  of  food  in 
New  England  and  was  also  the  raw  material  for  the  famous 
rum  of  that  section.  On  the  other  hand,  New  England  op- 
posed high  duties  on  hemp,  because  it  would  increase  the  cost 
of  cordage,  which  was  an  essential  material  in  shipbuilding, 
while  those  interested  in  Western  lands  wished  to  develop  the 
growth  of  hemp.  New  England  representatives  were  willing 
to  encourage  the  manufacture  of  nails  by  a  protective  duty, 
and  Pennsylvania  championed  the  special  needs  of  steel ;  but 
a  Southern  representative  feared  that  agriculture  would  be 
depressed  by  high  prices  of  farming  tools.  The  interior  and 
agricultural  sections  of  the  South  vigorously  opposed  an  impost 
on  salt,  as  an  unequal  tax  which,  like  an  uniform  poll  tax,  would 
discriminate  against  the  poor,  and  would  be  particularly  bur- 
densome to  the  interior  settlements  with  cattle  needing  a 
large  supply  of  salt.  In  general  the  South  strongly  protested 
against  the  immense  increase  in  rates  proposed  in  protective 
amendments,  and  animadverted  on  the  sectional  character  of  a 
tariff  which  was  designed  to  assist  the  producing  manufacturers 
rather  than  the  purchasing  agriculturists.  In  the  Senate  there 
was  a  tendency  to  reduce  the  rates  voted  by  the  House ;  partly 
because  the  high  duties  would  decrease  the  revenue  ;  partly  to 
prevent  an  incitement  to  smuggling. 

The  rates  of  duties  as  finally  fixed  by  the  act  of  July  4, 
1789,  provided  for  specific  duties  on  over  thirty  kinds  of 
commodities;  for  ad  valorem  rates  varying  from  1%  to  15 
per  cent,  on  a  few  specified  articles,  and  for  a  5  per  cent, 
duty  on  all  articles  not  enumerated.  For  example,  iron  was 
to  pay  lYz  per  cent. ;  glass  ware,  China  ware,  and  stone  ware 
10  per  cent.  Among  the  specific  rates  the  most  important 
were  as  follows:  cocoa  1  ct.   per  lb.;   coffee  2^  cts.  per  lb.; 

6 


82      Establishment  of  National  System.     [§35 

molasses  2^  cts.  per  gallon;  Jamaica  spirits  10  cts.  per  gal. ; 
all  other  spirits  8  cts.  per  gal. ;  brown  sugar  1  ct.  per  lb. ;  re- 
fined sugar  3  cts.  per  lb. ;  tea  from  6  to  20  cts.  per  lb. ;  salt 
6  cts.  per  bu. ;  Madeira  wine  18  cts.  per  gal. ;  other  wine  10 
cts.  per  gal. ;  tarred  cordage  75  cts.  per  cwt. ;  untarred  90  cts. 
per  cwt. ;  hemp  60  cts.  per  cwt. ;  nails  1  ct.  per  lb. ;  steel  56 
cts.  per  cwt. ;  twine  $2  per  cwt.  There  were  also  specific  du- 
ties on  ale,  beer,  porter,  cider,  boots  and  shoes,  candles,  play- 
ing cards,  woollen  and  cotton  cards,  cheese,  coal,  fish,  indigo, 
iron  chains  and  cables,  malt,  soap,  manufactured  tobacco  and 
snuff.  It  is  estimated  that  the  average  rate  of  duty  under  this 
tariff,  reduced  to  an  ad  valorem  basis,  was  8*4  per  cent. 

In  the  debate  there  was  little  fiscal  generalization ;  Madison 
indeed  was  the  only  man  to  treat  the  subject  broadly,  and  he 
preferred  to  confine  the  bill  to  the  object  of  revenue.  He 
held  that  if  industry  and  labor  be  left  to  take  their  own  course 
they  will  generally  be  directed  to  those  objects  which  are  the 
most  productive.  However,  he  stated  some  exceptions  to 
the  general  rule  of  freedom  :  established  manufactures  ought 
not  to  be  ruined ;  prohibition  for  sumptuary  reasons  might 
be  allowed ;  and  protective  duties  might  be  justified  for 
purposes  of  embargo  in  time  of  war  and  for  purposes  of 
defence. 

The  first  tariff  act  was  limited  to  seven  years ;  plainly 
Congress  was  not  yet  prepared  to  adopt  a  high  tariff  as  a 
permanent  system.  Small  changes  and  additions  were  enacted 
from  time  to  time,  but  they  were  limited  in  duration ;  thus 
the  tariff  acts  of  1790  and  1791  were  to  be  continued  until 
the  special  purposes  for  which  they  were  enacted  should  be 
subserved  ;  and  the  act  of  1 792  imposing  a  temporary  addition 
of  2^  on  the  5  per  cent,  ad  valorem  list  was  limited  to  two 
years,  although  afterwards  prolonged  until  1797. 

Until  182 1  no  separation  was' made  in  the  statistics  of  the 
value  of  imports  between  the  amounts  of  dutiable  and  free 
goods,  so  that  it  is  impossible  to  state  the  average  rate  of 
duty  on  the  commodities  which  paid  an  import  duty.     The 


35] 


Tariff  Measures. 


83 


per  cent,  paid  on    the  aggregate  value  of  goods  imported  in 
the  years  1791-1801  was  as  follows:  — 


Year 

Per  cent 

Year 

Per  cent 

1791 

8* 

•797 

10 

1792 

11 

•798 

m£ 

'793 

«*£ 

•799 

ilA 

•794 

•4 

1800 

»% 

•795 

9 

1 801 

9 

1796 

*% 

Besides  the  protective  features  the  act  of  1789  included 
important  administrative  details ;  such  as  the  use  of  both 
specific  and  ad  valorem  duties,  the  granting  of  drawbacks  on 
the  exportation  of  goods  imported,  and  the  principle  of  dis- 
crimination against  the  shipping  of  foreign  countries  as  a  whole 
and  against  particular  countries.  Regard  was  shown  to  the 
trade  with  the  East;  the  specific  duties  placed  upon  teas 
were  doubled  if  the  importation  was  made  in  foreign  vessels ; 
and  on  all  other  goods  imported  from  China  or  India  in 
foreign  ships  there  was  the  higher  ad  valorem  rate  of  12  per 
cent.  This  principle  of  discrimination,  though  recognized  in 
subsequent  tariffs,  was  gradually  abandoned,  and  any  advan- 
tage thus  derived  was  later  sacrificed  by  the  grant  of  recip- 
rocal commercial  privileges  in  treaties  with  foreign  powers. 
On  goods  imported  in  vessels  built  or  owned  entirely  in  the 
United  States  there  was  a  discount  of  10  per  cent,  on  the 
duties. 

The  original  tariff  measure  included  tonnage  duties  and  in 
determining  these  there  arose  the  question  of  foreign  dis- 
crimination against  American  shipping,  and  of  compelling 
proper  treatment  by  levying  specific  rates  upon  vessels  of 
those  foreign  nations  which  did  not  have  trade  relations  with 
the  United  States.  These  questions  were  separated  and  dis- 
posed of  in  the  tonnage  act  of  July  20,  1789,  which  imposed 
a  tax  of  6  cents  per  ton  upon  American  built  and  owned 
vessels,  30    cents    upon  vessels  American   built   and   foreign 


84     Establishment  of  National  System.     [§  36 

owned,   and   50  cents  upon  foreign  built  and  foreign  owned 

shipping  j    in    spite    of  great    opposition    this   discrimination 

applied  also  to  France. 

Closely  following  the  tariff  measure  was  an  act  for  regulating 

the  collection  of  duties.     In  many  of  its  details  it  followed 

the  laws  of  New  York,  the  State  which  had  the  largest  amount 

of  foreign  trade  during  the  period  of  the  Confederacy.     The 

country  was  divided  into  collection  districts ;  ports  of  entry 

and  delivery  were  enumerated  ;  and  provision  was  made  for  the 

appointment  of  collectors,  naval  officers,  surveyors,  weighers, 

measurers,  gaugers,  and  inspectors.     The  administration  of  the 

customs  during  the  early  years  was  simple,  and  in  place  of  a 

rigid  system  of  forms  governing  every  detail  much  was  left  to 

the  discretion  of  the  collectors.     A  few  years  later,  in  1799, 

with    experience    as  a  guide,  more  elaborate  legislation  was 

enacted,    carefully    prescribing    forms,  bonds,  schedules,   and 

oaths. 

36.    Principle  of  Protection. 

In  the  later  fierce  and  partisan  discussions  over  the  first  tariff 
the  question  has  often  arisen  how  far  it  was  intended  to 
operate  in  ways  other  than  for  revenue.  The  preamble  un- 
doubtedly expresses  the  principle  of  protection  in  the  words, 
"  Whereas  it  is  necessary  for  the  support  of  the  government, 
for  the  discharge  of  the  debts  of  the  United  States,  and  the 
encouragement  and  protection  of  manufactures  that  duties  be 
laid,"  nevertheless  there  has  been  much  dispute  as  to  whether 
this  first  tariff  was  really  protective  in  design. 

The  protectionist  character  of  the  first  tariff  is  supported  by 
Bolles,  and  more  recently  by  Prof.  William  Hill,  in  a  careful 
monograph  on  the  "  Early  Stages  of  the  United  States  Tariff 
Policy,"  who  argues  that  "  the  encouragement  and  protection 
of  manufactures  was  at  least  as  important  as  any  other  motive 
in  securing  the  passage  of  the  act."  The  considerations 
which  he  advances  appear  to  be  conclusive.  The  legislation 
of  the  several  States  had  been  thoroughly  protective  ;  England 
by  her  measures  for  securing  the  monopoly  of  the  carrying 


§  37]  Treasury  Department.  8  c 

trade  had  so  aroused  and  angered  the  Americans  that  the  free 
trade  ideas  of  the  early  Revolution  had  practically  vanished ; 
and  the  statements  of  the  motives  of  those  who  took  part  in 
the  congressional  debates  are  explicit.  Not  only  was  Madi- 
son's revenue  measure  deliberately  set  aside  for  a  system  of 
protective  duties,  but  individual  members  voiced  the  pro- 
tective policy  boldly,  and  local  interests  as  in  subsequent 
tariffs  played  a  striking  part  in  the  struggle  to  adjust  rates. 

37.    Establishment  of  the  Treasury  Department. 

As  soon  as  the  revenue  bill  had  been  sent  over  to  the 
Senate,  the  House  immediately  began  to  consider  the  estab- 
lishment of  a  treasury  department.  There  was  still  a  lingering 
feeling  that  it  was  unsafe  to  intrust  large  financial  responsi- 
bilities to  one  person,  and  the  House  long  discussed  whether 
the  department  should  be  under  a  commission  or  a  single 
head.  Gerry  discoursed  at  length  on  the  iniquity  of  the 
human  race ;  inquired  where  a  man  could  be  found  honest 
and  capable  enough  to  fill  the  office ;  and  reminded  his 
hearers  of  the  ugly  rumors  that  preceded  Morris's  retirement 
and  led  to  the  later  abolition  of  the  office  of  superintendent 
of  finance.  The  inefficiency,  however,  of  the  treasury  boards' 
preceding  the  administration  of  Morris  was  as  easily  remem- 
bered, and  the  decision  was  fortunately  in  favor  of  a  single 
secretary. 

There  was  more  discussion  over  the  powers  to  be  granted 
to  the  secretary.  The  bill  as  originally  introduced  authorized 
the  secretary  "  to  devise  and  report  plans  for  the  improvement 
and  management  of  the  revenue."  In  this  phraseology  the 
measure  followed  the  words  used  by  the  Continental  Congress 
in  1 781  when  it  established  the  superintendency  of  finance, 
and  in  1 784  when  it  created  the  revenue  board.  Neverthe- 
less, it  was  feared  that  the  duty  of  reporting  his  plans  would 
give  the  secretary  undue  influence  in  Congress,  and  that  it 
would  conflict  with  the  constitutional  provision  that  revenue 
bills  should  originate  in  the  House  of  Representatives.     Under 


86      Establishment  of  National  System.     [§37 

the  Constitution  the  House  of  Representatives  was  to  exer- 
cise less  power  over  the  secretary  of  the  treasury  than  Congress 
formerly  had  over  the  superintendent  of  finance  and  the 
revenue  board,  since  the  heads  of  departments  must  be 
appointed  by  the  president,  and  were  irremovable  by  Con- 
gress ;  it  was  therefore  urged  that  caution  should  be  exer- 
cised in  putting  powers  into  the  hands  of  an  irresponsible 
secretary. 

The  final  enactment  provided  that  there  shall  be  a  depart- 
ment of  the  treasury  in  which  there  shall  be  a  secretary  of  the 
treasury,  who  shall  be  the  head  of  the  department.  This  sec- 
retary was  to  digest  and  prepare  plans  —  the  word  "  prepare  " 
being  a  substitute  for  "  report "  —  for  the  improvement  and 
management  of  the  revenue  and  the  support  of  the  public 
credit,  to  report  budget  estimates,  to  superintend  the  collec- 
tion of  revenue,  to  decide  on  forms  of  keeping  accounts,  and 
to  execute  the  laws  relating  to  the  sale  of  public  lands.  This 
legislation  further  places  the  treasury  department  in  a  specially 
intimate  relationship  to  Congress,  independent  of  the  presi- 
dent, by  prescribing  that  a  call  for  financial  information  be 
made  directly  to  the  treasury  department  without  going 
through  the  president.  The  position  of  the  secretary  of  the 
treasury  was  thus  made  anomalous ;  and  Gallatin  afterwards 
questioned  whether  this  remarkable  distinction,  which  is  found 
to  pervade  the  laws  passed  during  the  early  years  of  Washing- 
ton's administration,  determining  the  power  of  the  treasury 
department,  was  not  introduced  in  order  to  give  to  Hamilton 
a  department  independent  of  every  executive  control.  Ham- 
ilton indeed  claimed  the  right  of  making  reports  and  propos- 
ing reforms  without  being  called  upon  for  the  same  by  Con- 
gress, but  in  practice  his  famous  reports  were  preceded  by 
specific  calls. 

The  bill  of  1 789  also  provided  that  the  report  of  the  secre- 
tary could  be  made  to  each  branch  of  the  legislature  either  in 
person  or  in  writing  as  might  be  required.  When  the  secre- 
tary of  the  treasury  in  1 790  announced  his  readiness  to  re- 


§  38]  Treasury  Department.  87 

port  on  a  plan  for  funding  the  public  debt,  the  House  of 
Representatives  decided  that  the  report  should  be  made  in 
writing,  chiefly  on  the  ground  that  only  in  that  way  could  it 
be  intelligently  considered.  Fear  was  again  expressed  of  the 
personal  influence  of  Hamilton. 

Another  important  point  is  the  confirmation  in  the  statute 
of  the  intention  of  the  Constitution  to  place  the  responsibility 
of  the  budget  upon  Congress  instead  of  upon  the  executive  as 
in  European  countries.  The  president  or  the  secretary  of  the 
treasury  may  be  called  upon  to  assist,  but  the  responsibility 
rests  with  Congress.  To  carry  out  this  practice,  in  1795 
when  the  Republicans  were  in  a  majority  in  the  House 
of  Representatives  under  the  leadership  of  Gallatin,  it  was 
further  ordered  that  a  standing  committee  on  finance  should 
be  established.  To  this  germ  of  the  later  ways  and  means 
committee  were  referred  all  reports  from  the  treasury  depart- 
ment, and  all  propositions  relating  to  revenue ;  and  to  it  was 
given  the  duty  of  reporting  on  the  state  of  the  public  debt, 
revenue,  and  expenditures. 

33.    Internal  Organization  of  the  Treasury  Department. 

Besides  providing  for  a  secretary,  the  law  authorized  the 
appointment  of  a  comptroller,  auditor,  treasurer,  register,  and 
an  assistant  to  the  secretary  to  be  appointed  by  the  secretary. 
All  save  the  last  are  accounting  officers  and  have  no  other 
functions.  The  number  of  comptrollers  and  auditors  has  been 
increased  with  the  growth  of  the  treasury  business,  but  the 
titles,  duties,  and  relations  of  the  above  officers  have  practi- 
cally remained  unchanged.  In  brief,  the  comptrollers  are 
authorized  to  look  into  the  propriety  of  the  accounts,  and  also 
to  countersign  warrants  drawn  by  the  secretary  of  the  treasury ; 
the  auditors  are  to  see  that  the  accounts  are  presented  in 
proper  clerical  form  ;  the  register  sees  to  it  that  the  vouchers 
of  bills  are  preserved ;  and  the  treasurer  that  no  money  leaves 
the  safe-keeping  of  the  government  save  on  proper  warrants. 
The  system  thus  devised  abounds  in  checks  and  safeguards  : 


88      Establishment  of  National  System.      [§38 

no  public  money  can  be  paid  out  except  under  an  appropria- 
tion made  by  Congress ;  the  executive,  represented  by  the 
auditor  and  the  comptroller,  scrutinizes  and  endorses  the  ac- 
count; a  warrant  must  be  signed  by  the  secretary  of  the  treas- 
ury, countersigned  by  the  comptroller,  and  recorded  by  the 
register,  and  only  then  can  the  payment  be  made  by  the 
treasurer.  In  order  to  strengthen  the  checks,  Madison  pro- 
posed that  the  comptroller  should  have  a  tenure  independent 
of  the  executive  branch,  a  suggestion  which  has  never  been 
adopted.  Although  the  system  is  clumsy,  it  is  almost  a  per- 
fect protection  against  payments  from  the  treasury  not  author- 
ized by  law,  or  to  persons  other  than  the  proper  recipients. 
Upon  the  comptroller  rests  the  responsibility  of  construing  the 
text  of  statutes,  and  of  withholding  payments  on  the  ground 
that  there  is  no  constitutional  or  statutory  provision  for  them. 

The  president  appointed  Alexander  Hamilton  secretary  of 
the  treasury,  September  11,  1789.  Though  only  about  thirty- 
five  years  of  age,  Hamilton's  ability  and  experience  fully 
justified  the  selection.  While  confidential  secretary  to  Wash- 
ington in  the  early  years  of  the  Revolution,  he  devoted  consid- 
erable attention  to  the  subjects  of  finance  and  trade  ;  in  1781, 
he  communicated  to  Robert  Morris  an  elaborate  plan  for  a 
bank,  and  in  1782  he  was  receiver  of  continental  taxes  in 
New  York.  To  these  special  interests  he  added  an  experi- 
ence as  congressional  delegate,  lawyer,  and  pamphleteer. 
He  had  been  especially  emphatic  and  insistent  in  demanding 
national  regulation  of  commerce  for  the  collection  of  revenue. 
Although  a  revenue  bill  had  been  passed  before  his  appoint- 
ment, Hamilton  was  well  in  touch  with  the  needs  of  the 
country  and  immediately  displayed  a  most  vigorous  initiative. 
As  secretary  he  prepared  many  reports,  among  which  the  five 
most  important  and  comprehensive,  both  in  grasp  of  principle 
and  in  practical  results,  are  :  Report  on  Public  Credit,  January 
9,  1790;  Report  on  a  National  Bank,  December  5,  1790; 
Report  on  the  Establishment  of  a  Mint,  May  r,  1791  ;  Report 
on    Manufactures,    December    5,    1791  ;   Second    Report   on 


§39]  Funding  of  the  Debt.  89 

Public  Credit,  January  21,  1795.  So  great  was  his  industry 
and  power  of  statement  that  he  was  able  to  submit  the  first 
four  of  these  documents  within  a  period  of  less  than  two  years. 

39.    Funding  of  the  Debt. 

These  great  reports  show  plainly  that  Hamilton  from  the 
first  had  in  his  mind  a  clearly  conceived  financial  system, 
including  additional  revenue,  the  adjustment  of  the  national 
debt,  extinction  of  the  State  debts,  a  national  coinage,  and  a 
national  bank.  The  first  question  which  he  faced  and  settled 
was  that  of  the  national  debt.  The  federal  debt  was  by  no 
means  light ;  in  addition  to  the  loans  contracted  abroad,  which 
have  been  discussed  in  the  previous  chapters,  there  was  a 
mass  of  unfilled  obligations  to  creditors  at  home.  Hamilton 
promptly  secured  a  request  from  the  House  to  prepare  a 
statement  in  regard  to  the  debt  and  a  plan  for  its  settlement ; 
and  he  had  it  ready  January  9,  1790,  as  his  Report  on  Public 
Credit.  The  foreign  debt,  which  had  been  for  the  most  part 
created  by  loans  in  definite  amounts  with  precise  conditions 
attached,  could  be  stated  with  a  fair  degree  of  accuracy ;  and 
it  does  not  appear  that  there  were  any  serious  differences  of 
opinion  in  regard  to  the  necessity  of  making  prompt  provision 
for  its  payment.  "  It  is  agreed,"  wrote  Hamilton,  "  on  all 
hands  that  that  part  of  the  debt  which  has  been  contracted 
abroad  and  is  denominated  the  foreign  debt  ought  to  be 
provided  for  according  to  the  precise  terms  of  the  contracts 
relating  to  it.  The  discussions  which  caji  arise,  therefore, 
will  have  reference  essentially  to  the  domestic  part  of  it,  or  to 
that  which  has  been  contracted  for  at  home.  It  is  to  be 
regretted  that  there  is  not  the  same  unanimity  of  sentiment 
on  this  part  as  on  the  other."  This  foreign  debt,  as  calcu- 
lated by  Hamilton,  amounted,  including  both  principal  and 
arrears  of  interest,  to  $11,710,000.  Not  only  had  the  United 
States  been  delinquent  in  the  payment  of  interest  for  periods 
varying  from  four  to  six  years,  but  it  had  failed  to  pay  the 
instalments  of  principal  which  began  to  be  due  in  1787. 


90      Establishment  of  National  System.     [§39 

The  amount  of  the  domestic  debt  was  much  more  difficult 
to  determine,  as  it  consisted  of  a  variety  of  credit  obligations 
issued  by  different  authorities  at  different  times,  bearing  dif- 
ferent rates  of  interest,  with  different  guarantees  of  redemption. 
This  was  estimated  by  Hamilton  as  principal  $27,383,000, 
accrued  interest  $13,030,000,  and  to  this  might  be  added 
$2,000,000  for  unliquidated  debt.  The  larger  part  of  the 
domestic  indebtedness  was  incurred  during  the  Revolutionary 
War,  with  subsequent  arrearages  of  interest;  between  1783 
and  1790  the  principal  had  been  slightly  reduced  by  the  sale 
of  public  lands,  but  the  unpaid  interest  had  gone  on  piling 
up,  so  that  a  third  part  of  the  domestic  indebtedness  in  1  790 
was  represented  by  arrears  of  interest. 

A  portion  of  the  credit  obligations,  although  in  the  form  of 
ordinary  loans,  had  passed  current  in  the  community  as  a 
monetary  medium,  and  in  company  with  all  the  other  out- 
standing promises  of  the  government  had  depreciated  in 
value.  The  important  question  then  arose  :  On  what  basis 
should  these  obligations  be  paid?  Should  present  holders  of 
national  certificates  of  indebtedness  be  paid  the  face  value 
of  the  certificates  which  they  might  hold ;  or  should  they  be 
paid  face  value  plus  the  accrued  interest ;  or  should  they 
be  paid  not  the  face  value,  but  what  they  had  paid  for  them. 
The  present  holder  of  a  certificate  might  have  taken  for  a 
personal  debt  of  only  $50  a  bill  dated  1783  for  the  face  value 
of  $100.  Should  the  government  pay  $100,  or  $130,  or  $50 
to  him  and  $50  to  the  original  holder?  This  question  was 
exhaustively  discussed  by  Hamilton  in  the  "  First  Report  on 
Public  Credit,"  and  the  conclusion  reached  that  present 
holders  should  be  paid  the  full  amount.  Hamilton  rejected 
the  doctrine  of  discrimination ;  in  the  first  place,  because  it 
was  a  breach  of  contract,  and,  secondly,  a  violation  of  the 
rights  of  a  fair  purchaser.  The  contract  was  that  the  people 
were  to  pay  the  sum  expressed  in  the  security  to  the  first 
holder  or  his  assignee  ;  every  buyer,  therefore,  stood  exactly 
in  the  place  of  the  holder,  and  having  acquired  that  right  by 


§39]  Funding  of  the  Debt.  9 1 

fair  purchase  his  claim  could  not  be  disputed  without  manifest 
injustice.  Those  who  parted  with  their  securities  from  neces- 
sity might  be  hardly  treated  ;  but  whatever  claim  of  redress 
they  might  have  should  be  brought  to  the  government  for 
settlement  on  independent  grounds  of  equity. 

The  subject  was  taken  up  in  the  House  of  Representatives 
January  28,  1790,  and  resulted  in  a  bitter  debate.  Popular 
feeling  was  strong  in  favor  of  discrimination,  inasmuch  as  it 
was  known  that  speculators  had  seized  the  opportunity  of 
making  profit  by  trading  upon  the  ignorance  of  the  people. 
Upon  the  publication  of  Hamilton's  report,  certificates 
went  up  to  fifty  cents  on  the  dollar.  A  member  of  the  House 
publicly  declared  that  "  Since  this  report  has  been  read  in 
this  House,  a  spirit  of  havoc,  speculation,  and  ruin  has  arisen, 
and  been  cherished  by  people  who  had  access  to  the  informa- 
tion the  report  contained,  that  would  have  made  a  Hastings 
blush  to  have  been  connected  with,  though  long  inured  to 
preying  on  the  vitals  of  his  fellow-men.  Three  vessels,  sir, 
have  sailed  within  a  fortnight  from  this  port  freighted  with 
speculation  ;  they  are  intended  to  purchase  up  the  State  and 
other  securities  in  the  hands  of  the  uninformed  though  honest 
citizens  of  North  Carolina,  South  Carolina,  and  Georgia.  My 
soul  rises  indignant  at  the  avaricious  and  immoral  turpitude 
which  so  vile  a  conduct  displays."  William  Maclay  in  his  Diary, 
January  15,  1790,  notes,  "This  day  the  budget,  as  it  is  called, 
was  opened  in  the  House  of  Representatives.  An  extraordi- 
nary, rise  of  certificates  has  been  remarked  for  some  time  past. 
This  could  not  be  accounted  for,  neither  in  Philadelphia  or 
elsewhere.  But  the  report  from  the  treasury  explained  all." 
He  remarks  that  he  cannot  call  at  a  single  house  but  traces 
of  speculation  in  certificates  appear,  and  one  of  his  associates, 
Hawkins  of  North  Carolina,  told  him  that  on  his  way  to  the  cap- 
ital he  passed  two  expresses  with  very  large  sums  of  money  on 
their  way  to  North  Carolina  for  purposes  of  speculation  in 
certificates.  Madison  was  ready  with  a  compromise,  and  pro- 
posed that  th.  present  holders  be  offered  the  highest  price  in 


92      Establishment  of  National  System.     [§40 

the  market,  the  residue  to  go  to  the  original  lenders,  —  he 
thought  it  possible  to  identify  the  present  holders  through  the 
presentation  of  certificates,  and  the  original  holders  by  the 
office  records,  —  but  even  he  could  not  devise  a  remedy  for 
intermediate  holders.  In  spite  of  opposition  Hamilton's  plan 
prevailed  ;  all  holders  of  certificates  were  to  receive  the  face 
value  of  the  government's  promise  with  interest,  the  only  ex- 
ception being  the  still  outstanding  continental  bills  of  credit, 
which  were  to  be  cancelled  at  only  100  for  1  in  specie. 

40.     Assumption  of  State  Debts. 

A  second  and  more  burning  question  connected  with  the 
funding  scheme  was  the  assumption  of  the  debts  of  the  several 
thirteen  States.  The  States  when  they  entered  the  Union 
under  the  Constitution  of  1789  brought  with  them  a  burden 
of  indebtedness,  largely  the  heritage  of  the  common  struggle 
for  independence ;  and  the  question  arose  whether  the  general 
government  should  remove  these  burdens  from  the  shoulders 
of  the  separate  States,  or  the  States  should  be  left  to  pay  their 
respective  debts.  Hamilton's  argument  in  favor  of  an  assump- 
tion was  exhaustive  :  it  would  contribute  to  a  more  orderly, 
stable,  and  satisfactory  arrangement  of  the  national  finances ; 
the  payment  of  public  debt  could  be  more  conveniently 
and  effectively  made  by  one  general  plan  than  by  different 
plans  originating  with  different  authorities ;  there  was  danger 
that  the  different  States  in  order  to  secure  their  own  local  revenue 
would  adopt  different  policies  of  taxation,  which  would  intro- 
duce confusion  and  oppress  industry  ;  and  as  the  States  had 
been  deprived  of  an  important  financial  instrument  by  giving 
up  import  duties,  the  situation  of  the  State  creditors  would 
be  worse  than  that  of  the  creditors  of  the  Union  unless  the 
federal  government  came  to  the  rescue.  Behind  these  argu- 
ments lay  Hamilton's  policy  of  consolidating  the  interests  of 
all  the  States  in  order  to  create  political  unity ;  and  for  this 
purpose  a  debt  might  indeed  be  regarded  as  a  blessing. 

The   Southern  States  strenuously  opposed   assumption  be- 


§  4°]  Assumption  of  State  Debts. 


93 


cause  their  debts  relative  to  population  were  much  less  than 
those  of  the  North.  They  thought  it  wrong  that  they  who 
had  gone  through  the  struggles  of  the  Revolution  and  had 
settled  their  current  financial  burdens,  whether  by  taxation  or 
by  repudiation  with  its  attendant  sacrifice  to  their  own  citizens, 
should  be  obliged  to  help  pay  the  debts  of  the  Northerners, 
who  had  relied  more  upon  borrowing  than  upon  taxation,  and 
were  now  desirous  of  saddling  their  debts  upon  the  South. 
Here  again  Hamilton  was  successful  in  carrying  through  his 
plan  of  assumption,  but  only  through  a  bargain  by  which  the 
South  was  granted  the  location  of  the  federal  capital  in  the 
territory  set  off  from  Virginia  and  Maryland. 

The  amount  of  stock  which  the  States  under  the  law  could 
subscribe  for  and  which  was  finally  assumed  is  stated  in  the 
following  table  :  — 


* 

State 

Permitted  by 
law 

Actually  as- 
sumed 

New  Hampshire 
Massachusetts 
Rhode  Island 
Connecticut 
New  York 
New  Jersey 
Pennsylvania 
Delaware 
Maryland 
Virginia 
North  Carolina 
South  Carolina 
Georgia 

$300,000 
4,000,000 

200,000 
1,600,000 
1,200,000 

800,000 
2,200,000 

200,000 

800,000 
3,500,000 
2,400,000 
4,000,000 

300,000 

$282,596 
3.98i,733 

200,000 
1,600,000 
'» '83,717 

695,203 

777.983 
59.162 

S'7.49' 
2.934,4i6 
'.793,8o4 

3.999.65' 
246,030 

Total 

$21,500,000 

$18,271,786 

No  subscriptions  of  certificates  were  received  except  those 
which  had  been  issued  for  services  or  supplies  during  the  war, 
and,  as  the  foregoing  table  indicates,  the  allowance  made  by 
the  act  for  most  of  the  States  was  ample. 

Hamilton  has  been  vigorously  criticised  for  thus  adding  to 
the  national  debt ;  it  is  plausibly  argued  that,  if  assumption 
were  a  matter  of  justice,  the  federal  government  should  have 


94      Establishment  of  National  System.     [§  41 

taken  into  account  the  payments  already  made  by  the  States 
in  the  reduction  of  their  debts,  or  even  have  gone  back  and 
reckoned  the  requisitions  honored  or  ignored  by  the  several 
commonwealths.  It  is  also  argued  that,  if  the  funding  had 
been  delayed  until  an  adjustment  of  accounts  of  the  debtor 
and  creditor  States  had  been  made,  the  obligations  for  which 
the  United  States  could  have  been  held  responsible  would 
have  been  reduced  by  #8,000,000.  Hamilton's  justification 
rested  upon  political  expediency  rather  than  upon  a  desire 
to  make  an  exact  financial  balancing  of  claims.  Not  only  was 
a  prompt  settlement  of  questions  of  dispute  of  greater  immedi- 
ate value  than  the  careful  adjustment  of  the  several  burdens, 
but  Hamilton  wished  to  gain  the  support  of  the  capitalistic 
class,  including  the  holders  of  State  funds. 

41.    Character  of  the  New  Debt. 

The  funding  act  of  August  4,  1 790,  under  which  the  old  in- 
debtedness was  provided  for,  authorized  three  different  loans  : 

1.  For  the  payment  of  the  foreign  debt  the  president  was 
authorized  to  borrow  a  sum  not  exceeding  $12,000,000, 
but  nothing  in  the  statute  prevented  an  early  redemption. 

2.  A  loan  to  the  full  amount  of  the  domestic  debt  was 
authorized,  subscriptions  to  be  received  in  any  of  the  certi- 
ficates of  indebtedness  which  the  government  had  previously 
issued  during  the  Revolutionary  War  and  the  Confederation. 
No  less  than  seven  classes  of  obligations  were  defined  by  the 
statutes.     These  were  as  follows  :  — 

(1)  Those  issued  by  the  register  of  the  treasury. 

(2)  Those  issued  by  the  commissioners  of  loans  according  to  the  act  of 
Jan.  2,  1779,  in  exchange  for  bills  of  credit  emitted  May  20,  1777,  and 
April  11,  1778. 

(3)  Those  issued  by  commissioners  to  adjust  the  accounts  of  quarter- 
masters and  other  supply  officers. 

(4)  Those  issued  by  commissioners  to  adjust  accounts  in  different 
States. 

(5)  Those  issued  by  the  pay  master- general. 

(6)  Those  issued  for  the  payment  of  interest  on  loans,  or  indents. 

(7)  Bills  of  credit,  at  the  rate  of  100  to  1. 


§  41]  Character  of  the  New  Debt.  95 

Subscribers  to  the  principal  of  the  new  debt  received  two 
certificates,  one  for  an  amount  equal  to  two-thirds  of  the 
subscription  to  bear  6  per  cent  interest;  the  other  for 
the  remaining  third,  beginning  to  bear  interest  after  1800. 
As  the  old  indebtedness  bore  a  uniform  rate  of  6  per  cent, 
interest,  this  legislation  practically  meant  a  reduction,  until 
1 801,  to  4  per  cent.  Holders  of  old  obligations  were  not 
obliged  to  convert ;  but,  as  it  was  probable  that  the  market 
rate  of  interest  would  fall  and  the  public  credit  would  rise,  it 
was  expected  that  the  government  would  speedily  be  in  a 
position  to  extinguish  the  old  debt,  which  was  redeemable  at 
pleasure,  and  thereby  to  terminate  the  interest.  Conversion 
therefore  appealed  to  the  reason  and  interest  of  creditors 
rather  than  to  their  necessities.  To  clear  off  the  arrears  of 
interest,  a  3  per  cent,  loan  was  authorized  dating  from  1791. 

3.  A  third  loan  of  $21,500,000  to  take  up  the  State  in- 
debtedness was  proposed,  subscriptions  to  be  receivable  in 
certificates  previously  issued  by  the  several  States  for  war 
purposes  up  to  specified  amounts.  Here  again  there  was  a 
complicated  provision  for  determining  the  rates  of  interest : 
each  subscriber  received  three  certificates,  one  for  a  sum 
equal  to  four-ninths  of  the  subscribed  sum  with  interest  at 
6  per  cent. ;  another  for  two-ninths  of  the  subscribed  sum, 
to  bear  interest  at  6  per  cent,  after  1800,  and  the  third  certifi- 
cate for  the  remaining  three-ninths,  bearing  an  interest  of  3 
per  cent.  In  the  assumption  of  the  debts  incurred  by  the 
States  it  was  necessary  to  adjust  the  accounts  between  the 
States  and  Congress  which  had  accumulated  during  the  Revolu- 
tionary period.  Commissioners  were  appointed  to  determine 
how  much  money  the  States  had  advanced  to  the  government 
and  how  much  the  government  had  advanced  to  the  States, 
so  far  as  such  advances  had  accrued  "for  the  general  or 
particular  defense  during  the  war."  The  States  which  had 
balances  placed  to  their  credit  were  entitled  to  have  them 
funded  upon  the  same  terms  with  the  other  part  of  the 
domestic  debt. 


96      Establishment  of  National  System.     [§  41 

The  debt  thus  funded  became  at  once  stable  and  suitable 
for  investment.  The  previous  domestic  debt  was  redeemable 
at  pleasure ;  but  the  government  agreed  to  limit  the  amount 
of  redemption  of  the  new  debt  in  any  one  year  to  a  specified 
amount.  The  government's  creditors  were  so  far  forth  better 
Off;  they  were  no  longer  subject  to  "the  prevailing  passions, 
prejudices,  or  intrigues  of  a  majority  of  but  a  single  branch  of 
the  government." *  Quarterly,  instead  of  annual,  payments 
of  interest  were  authorized,  at  thirteen  different  places  instead 
of  at  one.  The  national  revenues  were  pledged  to  the  pay- 
ment of  interest  on  domestic  stock,  subject  only  to  the  re- 
quirements necessary  for  fulfilling  the  conditions  of  the  foreign 
loan,  which  was  always  regarded  as  a  prior  claim  ;  and  the 
proceeds  of  the  sales  of  land  in  the  Western  territory  were 
also  pledged  for  the  discharge  of  the  debt. 

As  a  piece  of  fiscal  workmanship  the  funding  act  was  too 
complicated,  since  it  created  a  variety  of  new  stocks  or  bonds 
bearing  varying  rates  of  interest  with  varying  terms  of  redemp- 
tion. Hence  it  was  difficult  to  picture  clearly  the  fiscal  con- 
ditions of  the  government  year  by  year ;  and  charges  of 
treasury  juggling  with  debt  statements  were  common.  A 
more  excusable  error  in  the  plan  as  carried  out  lay  in  giving 
too  long  a  life  to  the  new  obligations.  A  few  years  later  in 
Jefferson's  administration  it  was  clear  how  much  more  advan- 
tageous to  the  treasury  would  have  been  the  right  to  pay  off 
at  least  a  portion  of  the  indebtedness  at  an  earlier  date.  On 
the  whole  the  funding  was  successfully  carried  out,  for  there 
was  a  prompt  acceptance  of  the  terms,  and  within  a  few  years 
the  old  confused  obligations  almost  disappeared,  as  may  be 
seen  from  the  subscriptions  to  the  new  stock  of  the  United 
States : 

I791 *3'.797.48i 

1792 

1793 26,160,777 

1794 5,096,678 

1  Kearny,  p.  18. 


CHAPTER  V. 
NEW   FINANCIAL   NEEDS,    1790-1801. 

42.    References. 

Bibliographies:   Bogart  and  Rawles,   19-23;    Charming  and  Hart, 

332-333.  340. 

Bank  :  (i)  Sources  :  Hamilton's  Report  in  American  State  Papers, 
Finance,  I,  67-76  ;  also  Finance  Reports,  I,  54-77  ;  also  Annals  of  Congress, 
1789-1791,  II,  2082-2112;  1940  (debates);  also  W.  MacDonald,  Select 
Documents,  67-98  (including  opinions  of  Jefferson  and  Hamilton)  ;  also 
Clarke  and  Hall,  Legislative  History  of  the  Bank,  15-35,  37-87  (debates), 
86-112  (cabinet  opinions);  Benton  s  Abridgment,  I,  272  (debates);  Stat- 
utes, I,  191  •  or  Dunbar,  22.  (ii)  Special  :  A.  Seybert,  Statistical  Annals 
(1818)  518-521 ;  L.  C.  Root,  in  Sound  Currency,  IV,  No.  7  (April,  1897) ; 
Bolles,  II,  127-141;  W.  G.  Sumner,  History  of  Banking  in  the  U.S.,  I, 
22-57;  Accounts  of  the  First  Bank,  in  Quar.  Jour.  Econ.,  VI,  471-474; 
C.  F.  Dunbar,  in  Quar.  Jour.  Econ.,  Ill,  54-58.  (iii)  General:  C.  A. 
Conant,  History  of  Modern  Banking,  288-294;  H.  White,  258-262;  J.  T. 
Morse,  Life  of  Hamilton,  I,  333-347;  J.  S.  Landon,  Constitutional  History 
of  the  U.  S.,  112-115;  R.  Hildreth,  IV,  256-266;  W.  G.  Sumner,  Hamil- 
ton, 162-170. 

Coinage:  (i)  Sources:  Hamilton's  Report  on  the  Mint,  in  American 
State  Papers,  Finance,  I,  97-107;  also  Finance  Reports,  I,  133-156;  also 
Annals  of  Congress,  1789-1791,  II,  2112  ;  also  Old  South  Leaflets,  No.  74  ; 
Statutes,  I,  246 ;  or  Dunbar,  227 ;  or  Repoi-t  of  Monetary  Commission  ( 1898), 
463;  Report  of  International  Monetary  Conference  (1878),  425-443  (plans 
of  Morris  and  Jefferson),  (ii)  Special  :  D.  K.  Watson,  History  of  Ameri- 
can Coinage,  30-70;  H.  R.  Linderman,  Money,  15-27;  J.  L.  Laughlin, 
Bimetallism  in  the  U.  S.,  13-24;  Bolles,  II,  156-174.  (iii)  General: 
McMaster,  I,  190-199  (plans  of  Morris  and  Jefferson) ;  J.  T.  Morse,  Lift 
of  Hamilton,  I,  351-356;  H.  C.  Lodge,  Hamilton,  106-108,  130. 

Excise  :  (i)  Sources  :  American  State  Papers,  Finance,  I,  64-67,  151- 
158,  348-350;  Annals  of  Congress,  1789-1791,  II,  pp.  1890-191061  seq.  (de- 
bates) ;  Annals,  1796-1797,  2791-2867  (report  on  opposition  to  excise); 
J.  B.  Thayer,  Cases  on  Constitutional  Law,  II,  1315  (carriage  case),  or  1 
Curtis'  Decisions,  150 ;  A.  Gallatin,  Writings  (Adams  ed.),  Ill,  87-96.  (ii) 
Special:  A.  Seybert,  Statistical  Annals  (1818),  455-478;  H.  C.  Adams, 
Taxation  in  the  U.S.,  1789-1816  (J.  H.  U.  Studies),  II,  45-60;  F.  C. 
Howe,  Taxation  under  Internal  Revenue  System,  12-38;  Bolles,  II,  103- 
126;  C.  F.  Dunbar,  Direct  Taxes  of  1861,  in  Quar.  Jour,  of  Econ.,  Ill, 
7  97 


98  Financial  Needs,  1790-1801.         [§43 

436.  (iii)  General:  Stevens,  Life  of  Gallatin,  50-56,  69-99  (Whiskey 
Rebellion) ;  H.  C.  Lodge,  Life  of  Hamilton,  180-1S4;  J.  T.  Morse,  Alex- 
ander Hamilton,  I,  348-351  ;  II,  147-171  ;  J.  P.  Gordy,  Political  Parties,  I, 
201-214;  R.  Hildreth,  IV,  253-255  ;  McMaster,  II,  25-81,  41-43,  189-203. 

Debt  and  Sinking  Fund  :  Statutes,  I,  281-433;  or  Dunbar,  32-35  ; 
Bolles,  II,  56-65;  J.  Elliot,  Funding  System,  Annals  of  Congress,  1795— 
1796,  1499  (debate  over  amount  of  indebtedness)  ;  E.  A.  Ross,  Sinking 
Funds,  in  Pub.  Amer.  Econ.  Assn.,  VII ;  J.  W.  Kearny,  Sketch  of  American 
Finances,  45-60. 

Expenditures:  American  State  Papers,  Finance,  I,  661  (statistics), 
755  (report  on  accounts) ;  Writings  of  Gallatin  (Adams  ed.)  Ill,  98-121  ; 
Bolles,  II,  182-202  (foot-notes  for  references). 

Hamilton's  Policy:  Annals  of  Congress,  1791— 1793,  p.  899  etseq. ;  or 
Benton's  Abridgment,  I  418-440  (debate  in  1793  on  official  conduct); 
Annals,  1799-1801,  p.  1273  (report  of  committee,  May  18,  1800);  Bolles, 
II,  175-181 ;  C.  F.  Dunbar,  Quar.  Jour.  Econ.,  Ill,  32-59;  E.  C.  Lunt, 
Hamilton  as  a  Political  Economist,  in  Journal  of  Political  Economy,  III, 
289;  J.  T.  Morse,  Life  of  Hamilton,  I,  370-425,  II,  20-66;  W.  G.  Sum- 
ner, Hamilton,  184-190. 

43.    First  United  States  Bank. 

Besides  the  questions  of  urgency,  such  as  the  provision  of  a 
revenue,  the  establishment  of  an  effective  administration  of 
finance,  and  the  satisfaction  of  the  government's  creditors, 
there  were  other  financial  problems  which  early  engaged  the 
attention  of  Congress.  In  part  these  were  inspired  by  Ham- 
ilton, who  had  definite  convictions  on  the  proper  relation  of 
government  to  finance,  and  in  part  they  were  due  to  new  and 
unforeseen  demands  on  the  treasury. 

Hamilton  was  convinced  that  a  national  bank  would  be  an 
important  factor  in  the  improvement  of  national  credit.  Little 
in  the  previous  experience  of  the  country  gave  encouragement 
to  such  a  project.  During  the  Revolutionary  period  several 
banking  propositions  had  been  discussed,  and  as  a  result  in 
the  decade  1780— 1790  three  institutions  had  been  established, 
—  the  Bank  of  North  America,  originally  chartered  by  Con- 
gress in  1 781  at  the  suggestion  of  Robert  Morris;  the  Bank 
of  New  York,  organized  in  1 784 ;  and  the  Massachusetts 
Bank.  Hamilton  had  already  shown  his  interest  in  the  subject 
by  co-operating  in  the  founding  of  the  Bank  of  New  York,  for 


§  43]  First  United  States  Bank.  99 

which  he  drafted  the  articles  of  association.  On  December 
13,  1790,  within  a  few  months  of  his  induction  into  office,  he 
presented  an  elaborate  document  in  favor  of  a  federal  bank. 
After  rapidly  reviewing  some  precedents  in  the  history  of 
other  countries  he  sums  up  the  advantages  which  would  be 
derived  from  such  an  institution  :  First,  there  would  be  an 
increase  of  actual  capital  by  an  enlargement  of  notes  in  circu- 
lation, by  providing  greater  use  of  individual  notes  of  hand, 
and  by  a  gathering  up  of  individual  deposits;  second,  the 
bank  would  make  it  easier  for  the  government  to  obtain  loans ; 
and,  third,  it  would  make  it  easier  for  the  individual  to  pay 
his  taxes  to  the  government,  since  he  would  have  a  greater 
opportunity  to  borrow,  and  there  would  be  an  increase  and 
quickening  of  the  circulation  of  money.  Hamilton  enumerated 
and  discussed  the  possible  economic  disadvantages,  such  as 
increase  of  usury ;  interference  with  other  kinds  of  lending ; 
temptation  to  overtrading ;  disturbance  of  the  natural  course 
of  trade ;  fictitious  credit  to  bankrupts ;  and  banishment  of 
gold  and  silver  from  the  country.  The  report  closed  with 
an  outline  of  a  constitution  of  a  bank.  In  the  congressional 
debate  which  followed,  the  opposition  dwelt  less  upon  the 
commercial  and  fiscal  merits  and  demerits  of  a  bank  than 
upon  the  charges  that  a  bank  would  be  a  monopoly  incon- 
sistent with  a  free  republic. 

After  the  debate  seemed  about  at  an  end,  it  was  renewed 
with  much  vigor  on  the  question  of  constitutionality.  Madison 
recalled  that  the  Constitutional  Convention  of  1787  had  re- 
jected the  insertion  of  a  power  to  Congress  to  grant  charters 
of  incorporation,  and  roundly  attacked  the  whole  idea,  assert- 
ing that  "  It  appeared  on  the  whole  that  the  power  exercised 
by  the  bill  was  condemned  by  the  silence  of  the  Constitution  ; 
was  condemned  by  the  rule  of  interpretation  arising  out  of  the 
Constitution ;  was  condemned  by  its  tendency  to  destroy  the 
main  characteristics  of  the  Constitution ;  was  condemned  by 
the  expositions  of  the  friends  of  the  Constitution  whilst  de- 
pending before  the  people ;  was  condemned  by  the  apparent 


ioo        Financial  Needs,  1790-1801.         [§43 

intentions  of  the  parties  which  ratified  the  Constitution ;  was 
condemned  by  the  explanatory  amendments  proposed  by 
Congress  themselves  to  the  Constitution." 

The  bill  passed  the  House  by  a  sectional  vote  of  39  to  20  ; 
in  the  negative  there  was  only  one  vote  north  of  Maryland, 
and  in  the  affirmative  but  three  south  of  that  State.  Washing- 
ton was  in  doubt  as  to  approving  the  bill,  and  asked  his  cabinet 
advisers  for  written  opinions  on  its  constitutionality.  Ran- 
dolph, the  attorney-general,  and  Jefferson,  secretary  of  state, 
submitted  adverse  opinions,  which  were  then  presented  to 
Hamilton  for  examination.  Hamilton's  opinion  is  one  of  his 
ablest  papers ;  it  not  only  solved  the  president's  doubts,  but  it 
furnished  an  arsenal  of  argument  to  be  drawn  upon  in  the 
future  for  a  generous  interpretation  of  the  Constitution. 

The  charter  provided  for  a  capital  stock  of  $10,000,000,  of 
which  one-fifth  was  to  be  subscribed  by  the  government ;  the 
remainder  was  open  to  public  subscription,  one-fourth  to  be 
paid  in  specie  and  three- fourths  in  government  stock  bearing 
6  per  cent,  interest.  The  government  subscription  was  to 
be  borrowed  from  the  bank,  payable  in  ten  annual  instal- 
ments, or  sooner  if  the  government  should  think  fit ;  the  note 
issues  of  the  bank  were  limited  by  the  provision  that  all  debts 
should  not  exceed  the  deposits  by  more  than  $10,000,000, 
and  they  were  receivable  for  all  payments  to  the  United  States  ; 
the  establishment  of  branches  was  authorized  according  as 
the  directors  might  deem  proper ;  and  periodical  statements 
of  the  bank's  condition  might  be  called  for  by  the  secretary 
of  the  treasury.  The  charter  was  to  run  for  twenty  years, 
and  in  the  mean  time  the  government  pledged  itself  to  grant 
no  other  bank  charter.  Capital  was  secured  without  difficulty, 
and  the  central  bank  was  opened  at  Philadelphia,  December 
12,  1 791,  followed  by  the  establishment  of  eight  branches,  at 
Boston,  New  York,  Baltimore,  Washington,  Norfolk,  Charles- 
ton, Savannah,  and  New  Orleans. 

In  a  history  of  government  firiance  the  chief  interest  in  the 
experience  of  the  United  States  Bank  lies  in  the  assistance 


§44]  Mint  and  Coinage.  101 

which  the  bank  rendered  to  the  government  treasury.  In  the 
first  place  the  bank  lent  the  $2,000,000  contemplated  in  the 
charter,  and  speedily  supplemented  this  aid  by  other  loans 
made  in  anticipation  of  taxes.  As  revenue  in  these  early 
years  was  uncertain,  and  expenditures  increased  out  of  pro- 
portion, the  government  had  a  valuable  advantage ;  but  un- 
fortunately it  proved  difficult  to  discharge  the  obligation  which 
had  been  so  easily  incurred,  and  by  1796  the  debt  to  the 
bank  had  increased  to  $6,200,000.  The  bank  then  became 
insistent  upon  payment  because  of  its  own  needs,  and.  the 
government  sold  a  portion  of  its  stock  in  1 796-1 797  ;  as  finan- 
cial pressure  still  continued,  by  1802  it  parted  with  all  its 
holdings.  The  sales  showed  a  profit,  yielding  a  premium  of 
$671,860.  In  addition  the  government  during  its  ownership 
received  dividends  of  $1,101,720,  or  about  8^6  per  cent, 
annually.  As  compared  with  the  payments  made  by  the  gov- 
ernment to  the  bank  for  its  loan,  the  original  investment 
netted  a  handsome  profit. 

The  second  fiscal  service  which  the  bank  rendered  to  the 
government  was  in  caring  for  its  funds.  As  the  government 
depended  for  its  revenue  almost  entirely  upon  customs  duties, 
collected  at  ports  extending  along  a  seaboard  of  thousands  of 
miles,  it  would  have  been  difficult  for  the  treasury  depart- 
ment in  the  early  years  of  its  existence  to  have  made  the 
necessary  transfers,  and  as  yet  there  were  but  few  local  bank- 
ing institutions  which  could  have  been  chosen  for  depositories. 
The  bank  and  its  branches,  however,  did  not  have  the  exclu- 
sive privilege  of  government  deposits.  In  181 1,  even  before 
rechartering  was  refused,  at  least  eleven  local  banks  were 
employed,  of  which  eight  were  in  the  eastern  section  of  the 
country ;  and  the  private  depositories  had  the  custody  of  one- 
third  of  the  public  deposits. 

44.     Mint  and  Coinage. 

During  the  Revolutionary  period  metallic  money  remained 
in  the  confusion  of  the  colonial  period.     Various  foreign  coins 


102        Financial  Needs,  1790— 1801.         [§44 

circulated  side  by  side,  as  the  English  guinea,  crown,  and  shil- 
ling ;  the  French  guinea,  pistole,  and  crown  ;  the  Spanish  pis- 
tole ;  and  the  Johannes,  half-johannes,  and  moidore ;  and 
unequal  values  were  given  in  different  parts  of  the  Union  to 
coins  of  the  same  intrinsic  worth,  thus  affording  opportunity 
for  clipping  and  fraudulent  change.  Various  units  of  account 
were  employed  in  different  sections  of  the  country,  which 
tended  to  obscure  a  clear  understanding  of  the  economic 
conditions  of  the  several  States.  The  Articles  of  Confedera- 
tion when  they  went  into  effect  in  1781  'did  not  contribute 
much  to  remove  the  complications,  for,  though  Congress  had 
power  to  regulate  the  alloy  and  value  of  coins  struck  either 
by  its  authority  or  by  that  of  the  States,  the  right  to  coin 
money  was  still  retained  by  the  State. 

Several  reports  had  been  made  on  the  subject  of  coinage. 
The  first  was  by  Robert  Morris,  January  15,  1782  ;  he  advised 
that  a  money  unit  affixed  to  both  metals  would  not  be  stable 
or  certain  ;  that  the  money  unit  should  be  attached  to  silver 
alone ;  and  that  no  coin  should  be  struck  to  correspond  to  the 
money  unit  selected.  The  unit,  by  a  system  of  elaborate  cal- 
culations, he  fixed  at  y^^  of  a  dollar,  assigning  as  a  merit  of 
this  particular  fraction  the  fact  that  all  the  currencies  of 
the  several  States  except  one  were  reducible  to  it  without  a 
remainder ;  and  that  consequently  it  could  be  adopted  by  any 
State  without  change  in  coin.  To  this  Jefferson  objected  on 
the  ground  that  the  unit  was  altogether  too  small  and  would  be 
inconvenient  in  commercial  computations,  and  as  a  substitute 
he  recommended  a  unit  of  the  value  of  the  Spanish  milled 
dollar,  with  which  the  colonies  had  long  been  familiar ;  and 
indeed  it  was  the  unit  in  which  the  public  debt  and  the  con- 
tinental currency  were  expressed.  Jefferson  also  advised  that 
the  money  unit  be  attached  to  both  metals.  Although  resolu- 
tions and  ordinances  were  passed  by  the  Continental  Congress 
in  favor  of  a  decimal  system  of  coinage,  no  practical  step 
beyond  the  coinage  of  a  small  amount  of  copper  coins  had 
been  taken  when  the  new  government  came  into  existence. 


§44]  Mint  and  Coinage.  103 

The  country  still  relied  upon  foreign  coins,  as  is  well  illustrated 
by  the  provision  in  the  act  of  July  31,  1789,  that  duties  were 
payable  in  the  gold  coins  of  England,  France,  Spain,  and 
Portugal,  or  in  other  gold  coins  of  equal  fineness. 

The  subject  of  coinage  was  exhaustively  considered  by 
Hamilton  in  a  report  submitted  to  Congress  in  May,  1791, 
in  which  he  stood  for  a  unit  expressed  in  both  gold  and  silver. 
While  gold  was  to  be  preferred  to  silver  for  certain  reasons,  he 
held  that  it  was  not  safe  to  abridge  the  quantity  of  circulating 
medium  by  annulling  the  use  of  silver.  .  He  recommended  that 
the  mint  ratio  between  gold  and  silver  be  1  to  15,  —  a  propor- 
tion corresponding  to  the  bullion  values  at  that  time,  —  and 
proposed  that  the  monetary  unit  consist  of  24^  grains  of  pure 
gold  or  371^  grains  of  pure  silver,  the  amount  of  silver  cor- 
responding as  nearly  as  could  be  determined  with  that  of  the 
Spanish  dollar  in  actual  circulation,  "each  answering  to  a 
dollar  in  the  money  of  account."  In  accordance  with  this 
plan  Hamilton  recommended  the  coinage  of  ten  dollar  and 
one  dollar  gold  pieces,  one  dollar  and  ten  cent  silver  pieces, 
and  one  cent  and  one-half  cent  copper  pieces.  There  is 
nothing  whatever  in  Hamilton's  report  which  countenances  silver 
monometallism  ;  gold  as  well  as  silver  was  recognized  as  an 
actual  standard  of  value  at  the  time,  and  Hamilton's  efforts 
were  directed  to  determining  a  ratio  between  gold  and  silver 
which  should  bring  uniformity  out  of  disorder  occasioned  by 
the  silver  coinage  then  current. 

The  Mint  Act  of  April  2,  1792,  substantially  followed  the 
suggestions  of  .Hamilton,  omitting,  however,  any  provision  for 
the  coinage  of  a  gold  dollar.  In  view  of  the  importance  which 
has  been  given  in  later  discussions  of  bimetallism  to  this  ini- 
tial coinage  legislation,  the  following  paragraphs  of  the  law  are 
significant : 

"  The  money  of  account  of  the  United  States  shall  be  ex- 
pressed in  dollars  or  units,  dimes  or  tenths,  cents  or  hundredths." 

"  There  shall  be  from  time  to  time  struck  and  coined  at  the 
said  mint  coins  of  gold,  silver,  and  copper,  of  the  following 


104        Financial  Needs,  1790-1801.         [§44 

denominations,  values,  and  description,  viz.  :  eagles  —  each  to 
be  of  the  value  of  ten  dollars  or  units,  and  to  contain  two 
hundred  and  forty-seven  grains  and  four-eighths  of  a  grain  of 
pure,  or  two  hundred  and  seventy  grains  of  standard,  gold  .  .  . ; 
half-eagles  —  each  .  .  .  ;  quarter-eagles  —  each  .  .  .  ;  dol- 
lars or  units  —  each  to  be  of  the  value  of  a  Spanish  milled 
dollar  as  the  same  is  now  current,  and  to  contain  three  hun- 
dred and  seventy-one  grains  and  four-sixteenths  parts  of  a 
grain  of  pure,  or  four  hundred  and  sixteen  grains  of  standard, 
silver." 

Because  there  was  no  distinct  provision  for  the  coinage  of  a 
gold  dollar,  it  has  been  hastily  concluded  by  advocates  of 
silver  coinage  that  the  original  unit  of  value  was  the  silver 
dollar.  The  error  has  resulted  from  not  observing  that  there 
are  different  kinds  of  units.  The  word  unit  as  employed  in 
the  Mint  Act  refers  to  a  unit  of  numbers,  and  not,  as  crudely 
interpreted,  to  a  unit  of  value. 

The  act  of  1792  has  indeed  been  given  greater  prominence 
than  it  deserves,  for  the  currency  question  at  that  time  did  not 
arouse  much  interest.  There  was  more  discussion  in  Congress 
over  the  expense  of  establishing  and  maintaining  a  mint  than 
there  was  over  the  ratio  or  the  choice  of  metals.  The  fierce 
debate  was  over  the  absorbing  question  whether  the  coins 
should  be  stamped  with  the  figure  of  the  head  of  the  president 
for  the  time  being  or  with  that  of  the  Goddess  of  Liberty. 
There  was  also  fear  of  enlarging  the  civil  establishment,  and 
thus  extending  the  power  of  the  federal  executive.  The  mint 
was  established  at  Philadelphia,  and  at  first  was  placed  under  the 
control  of  the  secretary  of  state,  but  later,  under  the  advice 
of  Hamilton,  it  was  transferred  to  the  treasury  department. 
Its  operations  were  on  a  small  scale,  and  there  was  complaint 
on  one  side  that  it  was  inefficient,  and  on  the  other  that  it  was 
too  expensive ;  consequently  an  attempt,  which  proved  un- 
successful, was  made  to  abolish  the  mint  and  entrust  the 
coinage  to  private  contractors. 


§  45]  Excise  Tax  on  Whiskey.  105 

45.    Excise  Tax  on  Whiskey. 

The  tariff  bill  of  1  789  was  passed  before  there  could  be  a 
full  knowledge  of  the  exact  needs  of  the  government  or  of 
the  productivity  of  a  given  schedule  of  duties,  but  it  soon 
became  evident  that  more  revenue  was  required ;  and 
Hamilton  promptly  recommended  both  an  extension  of  im- 
port duties  and  the  imposition  of  excise  duties.  Congress 
was  loath  to  vote  internal  taxes ;  the  creation  of  new  federal 
offices  was  unpopular,  while  the  suggestion  that  whiskey 
should  bear  the  important  part  in  this  new  class  of  duties 
aroused  intense  antagonism.  In  some  sections  of  the  country 
whiskey  was  so  common  an  article  of  daily  consumption  that 
its  special  taxation  was  regarded  as  a  discriminating  burden 
upon  one  of  the  necessities  of  life.  Under  these  conditions  it 
was  argued  that  a  tax  upon  spirits  was  in  the  nature  of  a  poll 
tax.  After  the  assumption  of  the  State  debts  and  the  shoulder- 
ing of  the  annual  interest  charge  thereon  the  need  of  further 
revenue  became  imperative ;  and  by  the  act  of  March  3, 
1 79 1,  Congress  adopted  a  portion  of  the  recommendations 
which  had  been  previously  submitted  by  Hamilton.  Under 
this  law  duties  were  laid  as  follows :  upon  spirits  distilled  from 
molasses,  sugar,  and  other  foreign  materials,  n  to  30  cents  a 
gallon  ;  upon  spirits  distilled  from  domestic  articles,  as  whiskey 
from  grain,  9  to  25  cents  a  gallon.  Administrative  machinery 
to  carry  out  the  provisions  of  the  act  was  also  created. 

The  revenue  collected  under  this  act  could  not  be  applied 
to  current  expenses,  but  was  to  be  devoted  solely  to  the  pay- 
ment of  the  interest  upon  the  general  debt,  and,  if  there  were  a 
surplus,  it  was  to  be  applied  to  the  payment  of  the  principal  of 
that  debt.  The  anticipated  opposition  to  these  duties  became 
so  strong  that  reductions  in  some  of  the  rates  were  made  by 
an  early  amendment  of  the  original  act.  To  country  pro- 
ducers was  granted  the  important  option  of  substituting  for  a 
tax  based  on  actual  product  a  license  tax  on  the  presumptive 
monthly  capacity  of  the  still.     By  this  system  manufacturers 


io6        Financial  Needs,  1 790-1801.         [§46 

hastened  to  improve  their  stills  in  order  to  increase  the  output, 
so  that  the  tax  per  gallon  was  reduced  to  about  3  cents,  and 
later,  according  to  an  estimate  in  1801,  to  three-fifths  of  a 
cent ;  thus  the  revenue  fell  far  below  reasonable  estimates. 

In  spite  of  all  these  concessions  the  tax  was  regarded  with 
hostility,  particularly  in  the  agricultural  regions  of  the  Middle 
and  Southern  States.  It  was  asserted  that  the  commercial 
and  importing  interests  of  New  England  disliked  the  tariff, 
but  looked  with  complacency  on  an  excise  upon  an  industry 
in  which  they  were  not  greatly  concerned.  The  opposition 
was  most  marked  on  the  frontier,  where  transportation  was 
so  difficult  and  expensive  that  the  only  way  in  which  corn 
could  be  made  productive  in  trade  was  by  its  manufacture  into 
a  form  which  would  reduce  its  bulk.  The  indignation  became 
wide-spread  and  intense,  and  finally  in  1 794  led  to  an  armed 
organization  in  Southwestern  Pennsylvania  and  to  an  open 
defiance  of  the  excise  officers.  Troops  were  called  out ;  the 
Whiskey  Insurrection,  as  it  was  called,  failed  as  an  attempt  to 
defy  the  national  government,  but  it  led  to  another  thresh- 
ing over  of  arguments  on  the  wisdom  of  excise  duties.  The 
four  main  arguments  against  the  tax  have  been  summarized 
as  follows  :  the  taxes  tended  to  contravene  the  principle  of 
liberty ;  they  injured  morals  by  inducing  false  swearing ;  they 
were  burdensome  because  of  oppressive  penalties ;  and  they 
interfered  unduly  with  the  process  of  distilling.  These  objec- 
tions were  carefully  met  by  Hamilton,  but  the  tax  was  not 
popular,  and  above  all  it  was  not  fruitful ;  its  gross  return  in 
1793  was  1422,000,  from  which  heavy  deductions  had  to  be 
made:  the  cost  of  collection  in  the  same  year  was  16.5  per 
cent.,  and,  if  the  drawbacks  allowed  be  deducted,  the  net  yield 
was  only  76.5  per  cent,  of  the  gross  receipts. 

46.     Other  Excise  Duties;  Carriage  Tax. 

The  unproductiveness  of  the  excise  simply  led  Hamilton 
and  his  successor  to  urge  and  secure  an  extension  of  the 
system  to  a  wider  range  of  commodities.     An  act  of  June  5, 


§46]  Other  Excise  Duties.  107 

1 794,  provided  for  taxes  on  carriages,  on  sales  of  certain 
liquors,  on  manufacture  of  snuff,  refining  of  sugar,  and  on 
auction  sales.  On  carriages  the  rates  of  duty  varied  according 
to  a  classification  into  coaches  driven  by  box  or  postilion, 
chariots  with  or  without  panels,  two-wheeled  top  carriages,  and 
other  two-wheeled  carriages.  Like  the  contemporary  English 
excise  law,  the  schedule  of  duties  did  not  include  wagons  used 
in  agriculture  or  for  transportation  of  commodities. 

The  constitutionality  of  the  act  was  questioned  so  far  as  it 
imposed  a  tax  on  carriages  and  gave  rise  to  the  important 
decision  by  the  Supreme  Court  in  1 796  in  the  case  of  United 
States  v.  Hylton.  The  point  of  contest  was  whether  the 
tax  upon  carriages  was  direct ;  if  so,  it  could  be  laid  only 
by  the  rule  of  federal  apportionment  as  prescribed  by  the 
Constitution.  The  decision  of  the  Supreme  Court  denied  this 
construction  and  gave  a  generous  interpretation  to  the  term  "  in- 
direct duties,"  though  an  interpretation  not  in  harmony  with 
the  definitions  ordinarily  used  by  modern  writers  on  finance. 
The  term  "duty"  was  held  to  be  only  less  comprehensive 
than  the  general  term  '-'tax."  As  in  Great  Britain,  —  whence 
the  United  States  took  the  general  ideas  of  taxes,  —  the  words 
"  duties,"  "  imposts,"  "  excises,"  "  customs,"  etc.,  embrace 
taxes  on  stamps  and  tolls  for  passage,  and  are  not  confined 
to  taxes  on  importations  only.  A  tax  on  expense  was  regarded 
by  the  court  as  an  indirect  tax ;  and  inasmuch  as  a  carriage 
was  a  consumable  commodity,  and  a  tax  on  it  was  a  tax  on 
the  expense  of  the  owner,  an  annual  tax  on  carriages  was  to 
be  properly  classed  as  an  indirect  tax.  Furthermore,  a  tax 
on  carriages  could  not  be  a  direct  tax,  because  apportion- 
ment would  tend  to  gross  and  arbitrary  differences  in  the 
contribution  of  each  State.  The  court,  without  giving  a 
judicial  opinion  on  the  exact  distinction  between  direct  and 
indirect  taxes,  was  inclined  to  believe  that  the  direct  taxes 
contemplated  by  the  Constitution  were  only  two,  —  a  capita- 
tion or  poll  tax,  without  regard  to  property,  profession,  or 
any  other  circumstance  ;  and  a  tax  on  land. 


108        Financial  Needs,  1790-1801.         [§46 

Professor  Dunbar  points  out  that  this  earlier  definition  of  a 
direct  tax  came  from  the  Physiocrats,  a  school  of  economic 
writers  who  held  that  agriculture  was  the  only  productive 
employment,  and  that  the  net  product  from  land,  to  be  found 
in  the  hands  of  the  landowner,  is  the  only  fund  from  which 
taxation  can  draw  without  impoverishing  society.  This  natur- 
ally led  to  a  classification  of  taxes  as  "  direct "  when  laid 
immediately  upon  the  landowner,  and  "  indirect "  when  laid 
upon  somebody  else.  With  the  interpretation  of  the  Constitu- 
tion given  by  the  Supreme  Court  the  text-writers  on  consti- 
tutional law  and  lawyers  have  been  in  general  accord.  Justice 
Story  in  his  "  Commentaries "  observes  that  all  taxes  are 
divided  into  two  classes,  —  those  which  are  direct  and  those 
which  are  indirect,  —  and  that  under  the  former  denomination 
are  included  taxes  on  land  or  real  property,  and  under  the 
latter  taxes  on  consumption.  The  decision  had  more  than  a 
current  significance,  and  its  influence  is  to  be  noted  later  in 
the  discussions  upon  the  income  tax. 

Among  the  excise  duties  was  a  license  tax  of  $5  upon  retail- 
ers of  wines  and  foreign  liquors  (June  5,  1794)  ;  a  tax  so 
light  that  it  could  not  cause  hardship,  although  the  principle 
of  uniform  licenses  naturally  operated  as  a  premium  to  large 
dealers.  On  the  manufacture  of  snuff  a  tax  of  8  cents  a 
pound  was  laid  June  5,  1794,  but  this  did  not  prove  pro- 
ductive ;  it  was  soon  discovered  that  the  money  withdrawn 
from  the  treasury  under  the  grant  of  drawbacks  on  the  export 
of  snuff  exceeded  the  return  from  the  tax  itself,  and  this  tax 
was  consequently  soon  abandoned.  Upon  the  manufacture 
of  sugar  a  duty  of  2  cents  a  pound  was  imposed,  and  as  the 
domestic  manufacture  supplied  nearly  all  that  was  consumed 
in  the  country  the  tax  met  the  expectations  of  Congress. 
The  tax  on  auction  sales  (June  9,  1794)  was  at  the  rate  of 
25  cents  per  $100  for  sale  of  goods  connected  with  hus- 
bandry and  50  cents  per  $  100  upon  other  goods.  The  pro- 
ductiveness of  this  tax  was  largely  determined  by  the  degree 
of  honesty  in  the  auctioneers,  and  false    accounts  were  not 


§  47 J  Direct  Taxation.  109 

uncommon.  As  the  needs  of  the  government  increased,  a 
further  extension  of  excise  taxation  was  made  July  6,  1797, 
by  the  imposition  of  duties  upon  legal  transactions,  to  be 
collected  through  the  sale  of  stamps,  which  were  affixed  to 
the  legal  documents  concerned. 


47.     Direct  Taxation. 

As  early  as  1794  direct  taxation  was  suggested,  and  in  1796 
the  secretary  of  the  treasury  was  directed  to  prepare  a  scheme 
for  that  purpose.  The  principal  motives  assigned  in  its  favor 
were  the  needs  of  the  treasury,  and  the  danger  of  relying  so 
largely  upon  revenues  derived  from  commerce,  which  was 
liable  to  disarrangement  by  European  wars  :  there  ought  to 
be  other  supplies  of  revenue  besides  customs  to  fall  back 
upon.  The  opposition  insisted  that  direct  taxation  was  irri- 
tating to  the  people,  and  should  be  used  only  in  extreme 
cases ;  it  was  unequal,  and  consequently  unjust. 

The  first  direct  tax  was  imposed  by  act  of  July  14,  1798, 
and  the  amount  to  be  apportioned  among  the  States  was 
$2,000,000.  It  was  laid  upon  all  dwelling-houses  and  lands 
and  on  slaves  between  the  ages  of  twelve  and  fifty.  The 
assessment  was  curious  and  careless ;  upon  houses  the  rate 
was  progressive;  for  example,  on  houses  valued  between  $100 
and  $500  the  rate  was  two-tenths  of  one  per  cent,  while  on 
dwelling-houses  valued  at  more  than  $30,000  the  rate  was 
one  per  cent.  Upon  every  slave  the  tax  was  50  cents. 
After  deducting  the  sums  thus  assessed  upon  dwelling-houses 
and  slaves,  within  the  United  States,  from  the  sum  appor- 
tioned to  each  State,  the  remainder  was  assessed  upon  the 
land  according  to  a  valuation  of  each  piece  at  such  a  rate 
as  would  produce  the  given  sum.  The  proportions  of  the 
$2,000,000  assessed  was  calculated  to  fall  as  follows  :  upon 
houses,  $1,315,000  ;  lands,  $457,000  ;  slaves,  $228,000.  The 
tax  did  not  operate  according  to  the  estimates  made  before 
its  passage ;  and  payments  were  so  tardily  made  that  at  the 


iio        Financial  Needs,  1 790-1801.         [§48 

end  of  three  years  one-fifth  of  the  tax  still  remained  unpaid. 
In  1800  the  receipts  were  $734,000,  and  in  1801  $534,000. 

48.     Summary  of  Receipts,  1789-1801. 

On  the  whole  the  government  made  a  successful  beginning 
with  taxation  ;  notwithstanding  the  friction  in  the  levy  of  the 
excise  duties,  the  morbid  apprehensions  of  1787  were  shown  to 
be  unwarranted.  Even  if  economic  development  was  back- 
ward, if  the  population  was  not  compact  enough,  if  opportuni- 
ties for  evasion  were  easy  and  the  expense  of  collection  great, 
there  was  no  longer  reason  to  fear  that  the  excise  duties  would 
be  a  despotic  invasion  of  a  subject's  liberties.  Although  the 
receipts  were  small,  the  fact  that  the  government  had  made 
clear  its  power  to  levy  the  duties  was  a  promise  of  future 
financial  support.  The  direct  tax  proved  to  be  a  clumsy 
and  an  ineffective  instrument  of  revenue;  import  duties, 
however,  justified  all  the  claims  made  for  their  serviceable- 
ness  ;  they  steadily  increased,  being  more  than  twice  as  much 
in  1800  as  in  1791,  and  there  were  no  indications  that  they 
disturbed  the  normal  course  of  industry  or  discriminated 
against  any  section  or  class.  The  receipts  from  sales  of 
public  lands  did  not  at  the  time  yield  much  revenue.  By 
years  the  ordinary  receipts  of  the  government  from  1791  to 
1 80 1  were  as  follows  :  — 


Calendar 

Customs 

Internal 

Miscella- 

Total 

year 

revenue  3 

neous  2 

ordinary 

1791' 

$4,399,000 

$10,000 

$4,409,000 

1792 

3,443,000 

$209,000 

17,000 

3,669,000 

"793 

4,255,000 

338,000 

59,000 

4,632,000 

•794 

4,801,000 

274,000 

356,000 

5.431,000 

•795 

5,588,000 

338,000 

188,000 

6,114,000 

1796 

6,568,000 

47S!000 

1,334.000 

8,377,000 

•797 

7,550,000 

575,000 

563,000 

8,688,000 

1793 

7,106,000 

644,000 

150,000 

7,900,000 

•799 

6,610,000 

779,000 

157,000 

7,546,000 

1800 

9,081,000 

1,543,000  3 

224,000 

10,848,000 

1S01 

10,751,000 

1,582,000  3 

602,000 

12,935,000 

1  Practically  two  years. 

2  Including  sales  of  public  lands,  dividends  on  bank  stock,  and  in  1796  and  1797  proceeds 
of  sales  of  hank  stock  owned  by  government,  and  in  180 1  sales  of  public  stores,  etc. 

3  Including  direct  tax  in  1800  and  1801. 


$3  000000 
2,500000 
2.000000 
1,500000 
1,000000 

500000 
0 
$4.500000 
4,000000 
3,500000 
3,000000  j-  j 
2,500000 
2,000000 
1,500000 
1,000000 
500000 
0 


NAVY 

L                                                                              /  \ 

xT** — 

179192    93    94  1795  96    97     98    99  1800   01    02     03    04  1305  06   07     08    09  1810  11 
No.   I.  — ORDINARY    EXPENDITURES,    1791-1811. 


49] 


Expenditures,  1 789-1801.  111 


49.    Expenditures,  1789-1801. 

Expenditures  exceeded  anticipations  during  the  period  of 
the  Federalist  administration.  Extraordinary  demands  contin- 
ued to  arise  which  absorbed  the  revenues,  in  spite  of  the 
enlarged  resources  from  excise  duties  and  advances  in  tariff 
rates.  The  Indian  War  which  broke  out  in  the  Northwest  in 
1790  was  succeeded  by  the  Whiskey  Insurrection  in  1794, 
and  by  strained  relations  with  England,  which  led  to  increased 
expenditures  for  the  army,  navy,  and  fortifications.  Peace 
was  made  with  Algiers  in  1795  only  by  a  heavy  money  pay- 
ment. Then  came  the  aggressions  of  France  in  1 797-1 798 
which  called  for  a  further  expansion  of  the  army  and  navy 
and  the  building  of  lighthouses  and  fortifications.  As  there 
was  no  decrease  in  the  public  indebtedness  until  1802  the 
interest  charge  continued  a  heavy  burden.  The  increase  of 
these  expenditures  is  illustrated  in  the  following  table :  — 


Calendar 
year 

War 

Navy 

Interest 
on  debt 

Miscel- 
laneous 

Total 

I7QI 

$633,000 

$1,178,000 

$1,286,000 

$3,097,000 

1792 

1,101,000 

2,373.°°° 

2,795,000 

6,269,000 

•793 

1,130,000 

2,097,000 

618,000 

3,846,000 

1794 

2,639,000 

$61,000 

2,752,000 

•  844,000 

6.297x00 

•795 

2,481.000 

410,000 

2,947,000 

1,471,000 

7,3og,ooo 

1796 

1,260,000 

274,000 

3,239,000 

1 ,016,000 

5,790,000 

•797 

1 ,039,000 

382,000 

3,172,000 

1,414,000 

6,008,000 

179S 

2,009,000 

1,381,000 

2, 95  Si000 

1,260,000 

7,607,000 

•799 

2,467,000 

2,858,000 

2,815,000 

1,155,000 

9,295,000 

1800 

2,561,000 

3,448,000 

3,402,000 

1,401,000 

10,813,000 

1801 

1,673,000 

2,1 1 1  ,o<>o 

4,412,000 

1,197,000 

9.393.OO0 

In  the  above  table  the  column  entitled  "  Miscellaneous " 
includes  expenditures  for  Indians,  pensions,  foreign  inter- 
course, and  the  civil  list.  According  to  the  treasury  classifi- 
cation only  in  one  year,  1796,  did  expenditures  for  Indians 
amount  to  $100,000,  and  pensions  rarely  reached  this  sum. 
The  "  civil  list  "  and  "  miscellaneous  civil "  varied  from  half 
a  million  to  a  million  dollars.  The  exceptional  outgo  in  1792 
is  explained  by  the  payment  of  $2,000,000  for  subscription  to 


112        Financial  Needs,  1790-1801.         [§  s° 

the  stock  of  the  Bank  of  the  United  States  and  by  certain 
adjustments  in  the  settlement  of  debts  apart  from  those  given 
in  the  loan  accounts. 

The  following  table  presents  in  a  condensed  form  a  com- 
parison of  the  annual  receipts,  expenditures,  and  changes  in 
debt  in  millions  of  dollars  (amounts  less  than  #100,000  in- 
dicated by*)  :  — 


Taxes 

E 

c 

CO 

0) 
3 
C 
■ 
> 
gj 

O 

H 

B 

3 

•5 
a 

0. 

X 

W 

■ 
3 
% 

3 
CO 

a 

« 
V 

>- 

E 
0 

3 
U 

y 

V 

5 

H 

0   v 

s 

1791 
1792 

"793 
1794 
'795 
1796 

'797 
1798 
1799 
1800 
1801 

4.4 

3-4 
4.2 
4.8 
5-6 
6.5 
7-5 
7-' 
6.6 
9-i 
10.7 

.2 

3 
•3 
•3 
•5 
.6 
.6 

•7 
.8 
1.0 

■7 
•5 

4.4 

3-7 
4.6 
5« 

5-9 
7-1 
8.1 
7.8 
7-4 
10.6 

'2-3 

* 
* 

1 

3 

3 
5 
1 

2 
6 

4-4 
3-7 
4.6 

5-4 
6.1 
8.4 
8.6 
7  9 
7  5 
108 
12.9 

3-i 

8.2 
3-8 
6.2 
7-3 
5.8 
6.0 
7.6 
9.2 
10.8 
9-3 

i-4 

.8 

2.6 

2.6 
•3 

3.O 

4-5 

.8 
1.2 

'•7 

50.    The  Debt,  1789-1801. 

Owing  to  the  new,  unanticipated  financial  burdens  it  was 
necessary  for  the  government  repeatedly  to  make  small  loans 
from  the  Bank  of  the  United  States  in  order  to  tide  over  im- 
mediate emergencies.  In  all  this  amounted  to  $10,376,000 
during  the  years  1 792-1 798.  A  part  of  this  embarrassing 
indebtedness  was  promptly  discharged,  but  about  one-third  was 
not  repaid  until  after  1801.  Besides  these  temporary  loans 
the  government  was  obliged  to  secure  authority  for  the  issue 
of  stock.  In  1798  a  loan  was  authorized  to  pay  the  builders 
of  naval  vessels,  which  finally  amounted  to  $7 11,700;  and  in 
the  same  year  a  loan  of  $5,000,000  was  authorized  to  make 
good  deficiencies  in  the  appropriations  and  for  military  pur- 
poses. In  1800  a  loan  for  similar  purposes  was  ordered,  from 
which  $1,481,700  was  realized.  The  last  .two  loans  were 
limited  in  duration    to    fifteen   years,   and    the  treasury  had 


§50 


Sinking  Fund. 


JI3 


to  pay  the  exceptional  rate  of  8  per  cent,  because  of  public 
expectation  of  war  and  invasion. 

By  years  the  total   amount   of  debt  and  its  composition 
1791-1801  was  as  follows  in  millions  of  dollars:  — 


Old 

New 

Total 

■O 

13 

Foreign,  includ- 

Year 

•a  X* 
hi 

•a  .. 

C  J2 
3  *> 

0 

ing    conversions, 

under  act  of 

March  3,  1795 

Time  loans, 
1798,  1800 

Temporary 

1791 

'•5 

61.0 

12.8 

75-4 

1792 

9-7 

529 

'4-5 

77.2 

'793 

55-4 

6.8 

■5-4 

2-5 

80.3 

•794 

55-7 

5-9 

•4-3 

2.4 

78.4 

'795 

60.6 

•9 

»4-7 

4-5 

80.7 

1796 

60.2 

3-3 

'3-9 

6.2 

83-7 

'797 

59-7 

3-' 

14.0 

5' 

82.0 

1798 

59- 1 

3-° 

130 

3-8 

79.2 
78.4 

'799 

58.4 

2.9 

12.9 

• 

3-8 

1800 

57-8 

2.8 

12.8 

5-7 

3-6 

82.9 

1801 

S7-o 

2.8 

12.4 

7-2 

3-4 

83.0 

*  Less  than  $100,000. 


51.     Sinking  Fund  ;  Management  of  the  Debt. 

In  the  earlier  years  of  financial  reorganization  the  credit 
of  the  government  was  strengthened  by  the  establishment  of 
a  sinking  fund  and  the  pledge  of  specific  revenues  for  the 
payment  of  the  debt  and  its  interest.  By  the  original  funding 
act  of  August  4,  1790,  the  proceeds  of  the  sales  of  public 
lands  in  the  Western  territory  were  pledged  solely  to  the  re- 
demption of  the  debt.  It  was  also  enacted  that  certain  sur- 
plus revenues  then  accruing  might  be  used  for  the  purchase 
of  public  stock  in  order  to  give  the  government  an  opportunity 
of  free  and  prompt  action  in  retiring  indebtedness,  as  well  as 
to  influence  the  value  of  public  stock  through  creating  a  de- 
mand. By  the  act  of  May  8,  1792,  a  regular  sinking  fund 
was  established,  to  which  were  inviolably  pledged  the  interest 
on  so  much  of  the  debt  as  had  been  heretofore  redeemed,  and 
the  surplus  of  all  sums  appropriated  for  the  payment  of  inter- 
est on  the  debt. 

8 


H4        Financial  Needs,  1 790-1801.         [§51 

A  commission  was  authorized,  consisting  of  the  president  of 
the  senate,  chief-justice,  secretary  of  state,  secretary  of  the 
treasury,  and  attorney-general,  to  make  purchases  for  this 
fund  and  to  render  appropriate  accounts.  The  fund,  how- 
ever, under  this  act  did  not  grow  rapidly,  since  the  annual 
interest  account  of  the  sinking  fund  amounted  to  less  than 
$40,000,  and  there  was  as  yet  no  permanent  appropriation 
out  of  the  treasury.  Another  step  in  the  arrangement  for 
a  sinking  fund  was  taken  by  the  act  of  March  3,  1795,  which 
enlarged  the  powers  of  the  commissioners  and  increased  ap- 
propriations to  the  fund  from  the  following  sources:  (1)  such 
part  of  the  duties,  including  import,  tonnage,  and  excises  on 
distilled  spirits  as,  together  with  other  income  accruing  to  the 
fund,  would  be  sufficient  to  make  a  beginning  in  1 796  of  defi- 
nite annual  reimbursements  of  the  6  per  cent,  stock  ;  (2)  the 
surplus  of  the  dividends  on  bank  stock  owned  by  the  govern- 
ment in  excess  of  the  interest  charge  which  the  government 
paid  to  the  bank  on  account  of  its  loan  ;  (3)  this  revenue  to 
be  supplemented  from  the  regular  revenue  so  as  to  begin 
annual  payments  on  the  bank  loan  and  thus  extinguish  that 
debt  by  1802.  The  fund  was  to  be  aided  by  the  sales  of 
public  lands  in  Western  territory ;  by  payments  made  on 
account  of  debts  due  to  the  United  States  prior  to  the  estab- 
lishment of  the  government  of  1789;  and  by  surpluses  un- 
appropriated. The  larger  part  of  these  supplies  were  of 
course  contingent,  and  could  not  be  relied  upon  for  constant 
aid.  The  appropriations  were,  however,  made  permanent,  to 
continue  until  the  whole  of  the  debt  excepting  the  3  per  cent, 
stocks  should  be  redeemed. 

In  the  development  of  this  sinking  fund  policy,  Hamilton 
took  the  leading  part ;  every  step  was  practically  inspired  by 
him,  and  then  and  since  controversy  has  arisen  with  regard  to 
the  accuracy  of  his  reasoning.  He  is  accused  of  introducing 
novel  complications  in  the  handling  of  the  debt  and  provision 
for  its  payment,  and  also  of  adhering  to  the  fallacy  that  a  debt 
may  be  paid  by  the  operation  of  compound  interest  applied 


§  52]  Hamilton  and  Wolcott.  1 1 5 

to  the  portion  of  the  debt  redeemed.  The  latter  charge  has 
been  carefully  considered  by  Professor  Dunbar,  who  concludes 
that  neither  Hamilton  nor  Pitt,  by  whom  he  was  undoubtedly 
influenced,  had  any  delusion  as  to  the  possibility  of  paying 
debt  without  money,  or  any  notion  that  compound  interest 
could  be  made  to  supply  the  place  of  an  adequate  revenue  or 
even  atone  for  its  possible  absence.  Hamilton  had  good 
grounds  for  anticipating  a  surplus,  and  on  this  hope  his  advo- 
cacy of  a  sinking  fund  was  really  based. 

52.     The  Administrations  of  Hamilton  and  Wolcott. 

In  spite  of  the  brilliancy  of  Hamilton's  administration  of 
the  treasury  department,  he  was  subjected  to  savage  criticism, 
inspired  in  part  by  the  fact  that  he  represented  federalism  in 
its  most  extreme  form,  and  was  consequently  attacked  on  gen- 
eral principles  by  the  supporters  of  State  sovereignty,  as  a  dan- 
gerous influence  in  the  political  development  of  the  United 
States.  A  more  specific  criticism  was  due  to  the  independent 
if  not  arbitrary  methods  followed  in  the  management  of  the 
treasury.  Hamilton  never  made  it  his  business  to  send  to 
Congress  regular  and  systematic  reports  on  the  condition  of 
the  treasury,  for  he  did  not  interpret  that  part  of  the  act  of 
1 789  which  bore  on  the  preparing  and  reporting  of  plans  as 
imposing  the  initiative  on  him.  Only  two  statements  of  the 
finances  between  1789  and  1801  can  be  regarded  as  orderly 
and  serviceable  records  of  the  progress  and  condition  of  the 
debt;  and  Gallatin  in  1801  was  the  first  secretary  to  render 
the  finance  report  which  is  now  annually  submitted  by  the 
secretary  of  the  treasury.  Hamilton  did  not  intend  to  de- 
ceive the  people  or  to  withhold  information  from  Congress, 
but  he  was  impatient  of  restraints  and  preferred  to  make  re- 
ports in  his  own  way  and  season.  The  complexity  of  accounts 
was  also  aggravated  by  the  fact  that  in  his  time  the  appropri- 
ations were  not  made  for  specific  objects  but  in  lump.  In 
1789  the  single  appropriation  bill  in  its  thirteen  lines  con- 
tained but  four  items,  —  for  civil  expenses,  for  military  ex- 


n6        Financial  Needs,    1790-1801.        [§52 

penses,  for  payment  of  the  public  debt,  and  for  pensions. 
Until  1809  it  was  possible  for  the  executive  to  transfer  unex- 
pended appropriations  at  will.  Such  loose  methods  provoked 
Gallatin  to  sharp  criticism,  which  at  first  was  regarded  by  Ham- 
ilton and  his  friends  as  a  reflection  upon  the  honesty  of  the 
treasury  administration. 

Notwithstanding  these  bitter  attacks,  Hamilton  enjoyed  the 
entire  confidence  of  Washington  and  was  defended  by  him  ; 
when  accused  in  1792  of  extravagance  and  improper  applica- 
tion of  moneys  expended,  a  congressional  inquiry  into  the 
accounts  of  the  treasury  department  found  that  no  improper 
appropriation  had  been  made,  although  there  had  been  an 
application  of  some  specific  appropriations  to  objects  other 
than  those  directed ;  but  even  these  had  been  done  with 
good  judgment  and  in  perfect  integrity.  Nevertheless,  the 
opposition,  led  by  Gallatin,  persisted  in  finding  fault  with  the 
debt  statements,  and,  with  some  justice,  protested  that  it  was 
difficult  to  tell  whether  the  debt  was  increasing  or  growing 
less.  In  1795  Gallatin  asserted  that  there  had  been  an  in- 
crease of  $5,000,000  in  the  public  debt;  but  a  supporter  of 
the  administration  claimed  errors  of  more  than  $4,500,000  in 
the  former's  estimate  ;  and  so  experienced  an  accountant  as 
Gallatin's  biographer,  Stevens,  declares  that  it  is  now  impos- 
sible to  determine  the  merits  of  the  controversy.1  A  part  of 
the  misunderstanding  was  undoubtedly  due  to  the  book-keep- 
ing of  the  sinking  fund,  where  there  was  so  much  complication, 
if  not  discrepancy,  that  an  easy  occasion  was  furnished  to  the 
critics  of  Hamilton.  Repeated  strictures  on  the  insufficiency 
of  the  treasury  statements  finally  led  to  the  act  of  May  10, 
1 800,  which  provided  :  "  That  it  shall  be  the  duty  of  the  sec- 
retary of  the  treasury  to  digest,  prepare,  and  lay  before  Con- 
gress, at  the  commencement  of  every  session,  a  report  on 
the  subject  of  finance,  containing  estimates  of  the  public  reve- 
nue and  public  expenditures,  and  plans  for  improving  or  in- 
creasing the  revenues,  from  time  to  time,  for  the  purpose  of 

1  Stevens'  Gallatin,  p.  130. 


§  52]  Hamilton  .and  Wolcott.  117 

giving  information  to  Congress  in  adopting  modes  of  raising 
the  money  requisite  to  meet  the  public  expenditures." 

After  Hamilton's  resignation  in  1 794,  his  understudy,  Oliver 
Wolcott  of  Connecticut,  was  appointed  secretary.  He  was 
justly  regarded  by  the  Republicans  as  the  tool  of  his  predeces- 
sor, and  from  1795  was  subjected  to  continued  suspicion  by 
those  who  were  endeavoring  to  ruin  Hamilton's  past  reputa- 
tion. Wolcott  resigned  in  1800  and  demanded  an  examina- 
tion of  his  official  conduct  as  secretary ;  the  report  of  a 
committee  of  the  House  of  Representatives  was  entirely  to 
Wolcott's  credit.  During  the  few  remaining  months  of 
Adams's  administration,  Samuel  Dexter  of  Massachusetts 
served  as  secretary.  As  a  whole  the  Federalist  administra- 
tion of  the  treasury  is  deserving  of  admiration  :  it  put  into 
operation  a  revenue  system,  varied  in  its  scope,  embracing 
customs  duties,  excise,  and  a  direct  tax ;  it  formed  a  treasury 
administrative  system  on  lines  which  have  been  substantially 
followed  until  the  present  day ;  it  safely  restored  the  credit  of 
the  government,  and,  if  the  debt  had  not  been  reduced  as 
much  as  it  had  been  hoped,  the  fault  did  not  lie  so  much 
with  the  administration  as  with  untoward  and  unexpected 
events.  The  finances  were  in  a  sound  state,  and  the  Federal- 
ists should  receive  some  of  the  credit  which  is  so  fully  granted 
to  Gallatin's  administration  during  the  next  ten  years. 


CHAFrER  VI. 
ECONOMIES  AND  WAR,  1801-1816. 

53.    References. 

Bibliographies:  Bogart  and  Rawles,  23-28  ;  Charming  and  Hart,  345. 

Economy,  Debt  Reduction  :  American  State  Papers,  Finance,  I,  746 
(report  of  committee  of  ways  and  means,  April  9,  1802);  or  J.  Elliot, 
Funding  System,  460-469;  Statutes,  II,  167  (Act,  April  29,  1802);  or  Dun- 
bar, 49  ;  Elliot,  ditto,  553  (note  on  loans) ;  Bayley,  339-341,  414;  Bolles, 
II,  66-72,  203-216;  J.  W.Kearny,  Sketch  of  American  Finances,  56-68 
(sinking  fund) ;  H.  Adams,  Life  of  Gallatin,  267-297,  348-355 ;  E.  A. 
Ross,  Sinking  Funds,  in  Pub.  Amer.  Econ.  Assn.,  V 'II,  63-68;  H.  C. 
Adams,  Public  Debts,  266-268 ;  H.  Adams,  History  of  U.  S.,  I,  238-242, 
251-255,  272;  J.  P.  Gordy,  Political  Parlies  in  the  U.  S.,  I,  398-403,  414- 
417;  J.  A.  Stevens,  Gallatin,  185-212  (debt),  224-240  (revenue),  251-256 
(accounts). 

Bank  :  American  State  Papers,  Finance,  II,  351-418,  453,  463,  480,  516 
(memorials,  Gallatin's  report,  dividends,  deposits)  ;  J.  Elliot,  Funding 
System,  513-517  (Gallatin's  report) ;  Clarke  and  Hall,  Documentary  His- 
tory of  Bank,  115-471 ;  Annals  of  Congress,  1810-181 1,  p.  488,  et  seq.  ;  or 
Benton's  Abridgment,  IV,  252,  et  seq.;  Bolles,  II,  145-152;  A.  Gallatin, 
Works,  HI,  328-334;  H.  Adams,  Life  of  Gallatin,  426-430;  H.  Adams, 
History  of  the  U.  S.,  Ill,  327-337,  V,  207,  327,  337;  H.  White,  263-270; 
Schouler,  II,  316-319;  McMaster,  III,  379-390. 

War  Finance  :  American  State  Papers,  Finance,  II,  374,  412,  441,  497, 
523  (Gallatin  reports);  538  (report  of  committee,  Feb.  17,  1812);  III, 
1-19  (review  by  Dallas,  Dec.  8,  1815)  ;  Gallatin,  Works,  I,  466;  J.  Elliot, 
Funding  System,  534  (Gallatin's  report  on  war  loans,  Jan.  10,  18 12),  also 
Gallatin,  Works,  I,  501-517,  642;  Bolles,  II,  219-224;  H.  C.  Adams, 
Public  Debts,  H2-126;  J.  W.  Kearny,  Sketch  of  American  Finances,  76- 
110;  H.  Adams,  Life  of  Gallatin,  445"452  ;  H.  Adams.  History  of  U.  S., 
VI,  156-175,  206-209,  438-448;  VII,  44,  365-390;  VIII,  239-262;  J.  A. 
Stevens,  Gallatin,  212-224,  239-248;  McMaster,  IV,  208-218,  233-236. 

Loans  and  Treasury  Notes:  American  State  Papers,  Finance,  IT, 
421,  564  (method  of  subscription),  569;  Statutes,  II,  694.  798;  III,  144, 
227;  or  Dunbar,  62-80;  Bayley,  342-354;  W.  F.  de  Knight,  45-56; 
Bolles,  221-224  ;  J.  J.  Knox,  United  States  Notes,  21-39  (treasury  notes). 

Internal  Revenue  and  Direct  Taxes:  American  State  Papers, 
Finance,  II,  627,  855;  Statutes,  III,  22,  39,40,42,44,77,  113.  137,  148, 
159  (internal  revenue);   53,  164,  255  (direct) ;  F.C.Howe,    fixation  in 

I  l  8 


§  54]  Reduction  of  Taxation.  119 

the  U.  S.  under  Internal  Revenue  System,  39-49  ;  Bolles,  II,  242-262  ;  H. 
C.  Adams,  Taxation  in  the  U.  S.  (J.  H.  U.  Studies),  II,  58-59;  C.  F.  Dun- 
bar, Quar.  Jonr.  Econ.,  \\\,  442-444;  J.  A.  Stevens,  Gallatin,  232-235, 
243-245;  H.  Adams,  History  of  the  U.  S.,  IX,  index  under  "  taxes " ; 
McMaster,  III,  441-443. 

54.    Economies  and  Reduction  of  Taxation. 

The  year  1801  marks  a  great  change  in  financial  as  in  po- 
litical ideals.  The  financial  policy  established  by  Jefferson's 
administration  was  prompted  by  two  fundamental  principles  of 
Republican  policy  :  first,  the  simplification  of  the  civil  service, 
not  merely  to  reduce  taxation  but  to  decrease  federal  execu- 
tive machinery  and  patronage  ;  and,  second,  the  abolition  of 
excise  duties,  which  in  Republican  party  philosophy  were  still 
held  to  be  inquisitorial  and  inconsistent  with  democratic  free- 
dom, particularly  in  time  of  peace.  The  application  of  these 
ideas  might  naturally,  if  there  were  no  further  disturbing 
factor,  work  out  a  harmonious  result  in  the  field  of  finance, 
since  a  reduction  of  expenditure  would  justify  a  reduction  of 
taxation.  For  secretary  of  the  treasury  Gallatin  was  the  logi- 
cal choice  ;  he  was  easily  the  leader  among  the  Republicans 
in  mastery  of  the  principles  of  political  economy,  in  skill  in 
handling  financial  details,  and  in  clearness  of  conviction  and 
intensity  of  purpose.  Like  Hamilton  of  foreign  birth,  he  had 
devoted  himself  to  a  public  career;  from  1790  to  1795  he  was 
a  member  of  the  Pennsylvania  legislature,  and  then  entered 
Congress ;  in  this  body  he  served  on  the  committee  of  ways 
and  means.  He  had  been  unceasing  in  his  demand  for  econ- 
omy, for  specific  instead  of  general  appropriations,  for  the 
extinction  of  the  debt  in  preference  to  military  and  naval 
expenditures,  and  for  a  change  in  the  form  of  the  sinking 
fund. 

The  Republican  party  when  in  opposition  had  constantly 
attempted  to  retrench  on  the  army  and  navy ;  in  the  troubled 
times  of  1  795  it  desired  to  restore  the  army  to  the  footing  of 
1792,  and  opposed  naval  appropriations,  on  the  ground  that  a 
navy  was  prejudicial  to  commerce.     When  the  power  came  no 


1 20  Economies  and  War.  [§  54 

time  was  lost ;  the  army  was  reduced  to  the  peace  establishment 
of  1 796  ;  the  construction  of  several  war  vessels  was  stopped  ; 
and  savings  were  made  in  the  diplomatic  and  customs  service. 
The  net  ordinary  expenditures  were  thus  brought  down  from 
nearly  $7,500,000,  exclusive  of  interest,  for  the  fiscal  year 
1 800,' to  less  than  $5,000,000  for  the  year  1801,  and  to  an 
average  of  $4,000,000  during  the  next  three  years. 

A  reduction  of  taxation  through  the  abolition  of  the  excise 
duties  was  promptly  undertaken,  though  Gallatin  would  have 
been  glad  to  retain  them  longer.  In  March,  1802,  John  Ran- 
dolph, the  chairman  of  the  committee  of  ways  and  means,  upon 
assurance  that  economies  of  $600,000  could  be  made  in  the 
navy,  recommended  the  repeal  of  these  taxes,  and  declared 
that  the  whole  system  of  internal  duties  was  vexatious,  oppress- 
ive, and  obnoxious,  hostile  to  the  genius  of  a  free  people,  and 
tended  to  multiply  officers  and  increase  the  burdens  of  the 
people.  The  measure  of  repeal  was  quickly  carried,  April  6, 
1802,  and  by  this  decisive  stroke  a  net  annual  revenue  of 
$600,000  was  lost  to  the  treasury,  —  of  this  about  five-sixths 
was  derived  from  the  tax  on  distilled  liquors.  The  Federalists 
urged  that  if  there  was  to  be  a  reduction  of  taxation  it  should 
not  be  on  the  luxury  of  distilled  spirits,  but  in  the  import  duties 
upon  tea,  coffee,  sugar,  and  salt,  the  necessities  of  life ;  more- 
over, the  excise  revenue  was  a  sure  resource,  while  the  fluctua- 
tions in  foreign  trade  made  the  impost  revenue  uncertain ;  and 
it  was  inexpedient  to  destroy  the  administrative  machinery  or- 
ganized for  the  collection  of  taxes,  which  had  been  brought 
into  good  working  order  through  ten  years  of  experience.  On 
the  other  hand,  statistics  were  presented  to  show  the  heavy 
cost  of  collecting  internal  revenue  duties;  22,000  stills  were 
scattered  over  the  immense  territory  of  the  United  States,  and 
the  licenses  paid  by  13,000  retailers  produced  but  $65,000. 
There  was  but  little  possibility  of  materially  lessening  the  ex- 
pense of  collection  so  long  as  the  objects  from  which  the 
revenue  was  drawn  were  so  dispersed. 


§55]        New  Demands  upon  Treasury.        121 

55.     New  Demands  upon  the  Treasury. 

It  was  not  long  before  a  special  strain  was  placed  upon  the 
treasury  by  an  agreement  to  pay  $15,000,000  for  the  purchase 
of  Louisiana.  To  meet  this  outlay  Gallatin  proposed  the  issue 
of  Si  1,250,000  new  6  per  cent,  stock,  redeemable  after  fifteen 
years  in  four  annual  instalments ;  $2,000,000  was  to  be  paid 
cash  down  from  the  surplus  in  the  treasury,  and  the  remainder 
was  to  be  met  by  a  temporary  loan.  The  purchase  came  at  a 
fortunate  time,  since  the  customs  in  1802  amounted  to 
$12,400,000  as  compared  with  $10,700,000  in  1801  and 
$9,100,000  in  1800.  The  country  was  taking  advantage  of 
the  European  war ;  its  neutral  commerce  was  expanding  at 
an  unprecedented  rate ;  exports  were  large  and  prices  high, 
customs  revenue  was  pouring  into  the  treasury,  so  that  on 
January  i,  1803,  there  was  a  balance  to  the  good  of  over 
$5,000,000.  The  success  of  the  loan  was  more  than  had  been 
anticipated.  The  abundant  revenue  on  the  one  hand  and  the 
economies  in  expenditure  on  the  other  made  it  possible  to 
effect  the  purchase  from  the  sale  of  the  new  stock,  and  ready 
money,  without  recourse  either  to  a  temporary  loan  or  to  new 
taxes. 

It  soon  become  necessary  to  seek  for  further  revenue  because 
of  war  with  Tripoli.  Instead  of  restoring  the  excise  duties  the 
act  of  March  26,  1804,  authorized  an  addition  of  2*/£  percent, 
on  all  imported  articles  which  paid  ad  valorem  duties,  and  an 
additional  duty  of  10  per  cent,  upon  goods  imported  in  foreign 
vessels.  The  proceeds  of  this  act  constituted  a  special  fund 
known  as  the  Mediterranean  Fund,  to  be  used  for  the  protec- 
tion of  the  commerce  and  the  seamen  of  the  United  States 
against  the  Barbary  Powers,  and  t6  be  levied  until  a  treaty  had 
been  made.  In  spite  of  Jefferson's  avowed  policy  of  peace  in 
foreign  relations,  and  Gallatin's  persistent  efforts  to  hold  the 
navy  department,  as  well  as  the  war  establishment,  down  to  a 
policy  of  Republican  economy  and  strict  accountability,  the 
administration  was  thus  forced  into  extraordinary  naval  expen- 


122  Economies  and  War.  [§  55 

ditures.  Gallatin,  however,  did  not  propose  that  the  demands 
of  the  navy  should  be  lost  in  the  general  budget,  but  intended 
by  making  this  a  special  fund  based  upon  special  taxes  to 
keep  before  the  public  a  clear  apprehension  of  the  burden  it 
was  carrying. 

Another  important  interruption  to  Gallatin's  plans  of  re- 
trenchment and  debt  extinguishment  took  place  in  1806, 
when  Randolph  proposed  the  repeal  of  the  salt  tax.  The  tax, 
though  always  unpopular,  had  been  retained  because  of  its 
productivity,  since  it  then  yielded  more  than  a  half  million 
dollars  per  annum.  Randolph  had  already  shown  his  inde- 
pendence of  the  administration,  and  apparently  was  seeking 
opportunity  to  exhaust  its  patience  ;  he  complained  that  the 
government  was  inconsistent  in  not  adhering  to  its  loudly 
proclaimed  policy  of  making  expenditures  according  to  spe- 
cific appropriations,  and  he  wished  therefore  to  straiten  and 
punish  the  treasury.  The  Federalists  supported  the  repeal, 
possibly  to  embarrass  the  government,  and  many  Republicans 
followed  Randolph,  not  so  much  for  the  reason  he  assigned 
as  because  of  the  general  unpopularity  of  the  tax.  The 
measure  at  first  failed  in  the  Senate,  but  in  the  course  of  the 
year  the  administration  recognized  the  popularity  of  Ran- 
dolph's proposition  and  submitted  in  advance  a  bill  for  the 
abolition  of  this  duty,  which  was  duly  enacted  March  3,  1807. 

The  next  blow  fell  in  1807,  when  the  misunderstandings  with 
Europe  on  account  of  the  establishment  of  the  continental 
system,  the  issues  of  the  English  orders  in  council,  the  Berlin- 
Milan  decrees,  and  the  impressment  of  American  seamen 
came  to  a  head ;  and  Jefferson  reluctantly  agreed  to  an  in- 
crease of  expenditures  for  national  defence.  While  yielding 
to  the  growing  demands  upon  the  treasury,  Jefferson  further 
disturbed  financial  security  by  entering  upon  the  alternate 
policies  of  non-importation  of  manufactured  goods  and  of 
forbidding  shipping  to  leave  American  ports.  This  commer- 
cial warfare  soon  upset  the  customs  receipts.  No  financial 
disadvantages  appeared  in  the  returns  for  1808;  but  in  1809 


§  56]  Receipts  and  Expenditures.  123 

the  customs  fell  from  $16,300,000  to  $7,200,000;  expendi- 
tures for  war  increased  from  $1,300,000  in  1807  to  $3,300,000 
in  1809  and  expenditures  for  the  navy  were  larger  by  more 
than  half  a  million  dollars.  The  fortification  of  ports  and 
harbors  was  hastened,  gunboats  were  purchased,  and  the 
regular  army  enlarged. 

In  December,  1809,  Gallatin  was  forced  for  the  first  time 
to  confront  a  deficit  in  the  budget,  which  was  $1,300,000 
short,  exclusive  of  payments  on  account  of  the  debt.  For- 
tunately there  was  a  handsome  balance  in  the  treasury  from 
past  savings,  which  could  provide  both  for  the  deficit  and 
current  expenditures,  as  well  as  for  debt  requirements.  Early 
in  1809  the  Embargo  Act  was  repealed,  and  commerce, 
although  still  burdened  with  a  non-intercourse  act,  was  re- 
sumed with  great  vigor.  The  customs  in  18 10  yielded 
$8,500,000  and  in  181 1  $13,300,000.  Appropriations  for 
the  army  and  navy  were  again  reduced,  and  thus  the  immedi- 
ate financial  danger  was  tided  over.  Still  the  causes  of  irrita- 
tion toward  England  were  at  work;  during  the  year  181 1  the 
country  drifted  rapidly  toward  hostilities,  and  in  June,  1812, 
war  was  formally  declared. 

56.    Receipts  and  Expenditures,  1801-1811. 

The  ordinary  receipts  during  the   peace  administration  of 
the  Republicans  are  concisely  condensed  as  follows  :  — 


Year 

Customs 

Other  revenue 

Total 

1801 

$10,750,000 

$2, 185,000 

$12,935,000 

1802 

12,438,000 

2,557.000 

14,995,000 

1803 

10,479,000 

585,000 

11,064,000 

1804 

11,099,000 

727,000 

11,826,000 

1805 

12,936,000 

624,000 

13,560,000 

1806 

14,667,000 

892,000 

15.559,000 
i6,3g8,ooo 

1807 

15,846,000 

552,000 

1 808 

16,363,000 

697,000 

17,060,000 

1809 

7,258,000 

515,000 

7,773,000 

1810 

8,583,000 

800,  OOD 

9,384,000 

1811 

13,313,000 

1,109,000 

14,422,000 

124 


Economies  and  War. 


[§57 


The  receipts  under  "Other"  in  the  above  table,  in  1801 
and  1802,  were  swollen  by  the  income  from  internal  revenue 
duties,  the  delayed  direct  tax,  and  the  sale  of  bank  stock. 
After  1803  the  revenue  from  the  sale  of  public  lands  began 
to  be  fruitful  and  is  responsible  for  nearly  all  of  the  subsequent 
receipts  in  this  column  of  the  table. 

Expenditures  by  years  during  the  same  period  were  as 
follows :  — 


Year 

War 

Navy 

Interest 
on  debt 

Miscel- 
laneous ' 

Total 

1 80 1 

$1,673,000 

$2,111,000 

$4,412,000 

$1,197,000 

$9,393,000 

1802 

1,179,000 

915,000 

4,239,000 

1,642,000 

7,976,000 

1803 

822,000 

1,215,000 

3,949,000 

1,965,000 

7,952,000 

1804 

875,000 

1,189,000 

4,185,000 

2.387,000 

8,637,000 

1805 

713,000 

1,597,000 

2,657,000 

4,846,000 

9,014,000 

1806 

1,224,000 

1,649,000 

3,368,000 

3,206,000 

9,449,000 

1807 

1,288,000 

1,722,000 

3,369.000 

1,973,000 

8,354,000 

1808 

2,900,000 

1,884.000 

2.5S7.000 

1,719,000 

9,061,000 

1809 

3,345,000 

2,427,000 

2,886,000 

1,641,000 

10,280,000 

1810 

2,294,000 

1,654,000 

3,163,000 

1,362,000 

8,474,000 

1811 

2,032,000 

1,965,000 

2,585,000 

1,594,000 

8,178,000 

1  Including  Indians  and  pensions. 

The  reasons  for  the  fluctuations  in  the  expenditures  for  war 
and  navy  have  already  been  alluded  to ;  the  interest  charge 
was  lowered  by  the  decrease  in  the  principal  of  the  public 
debt,  interrupted  by  the  Louisiana  purchase ;  and  the  ap- 
propriations of  large  amounts  for  "  foreign  intercourse  "  in 
1 804-1 806  account  for  the  exceptional  increase  under  "  Mis- 
cellaneous" in  those  years. 


57.    Reduction  of  Debt ;  Sinking  Fund. 

During  the  peace  administration  of  the  Republicans  there 
was  a  remarkable  reduction  in  the  debt;  between  i8or  and 
181 2  the  debt  was  cut  down  by  $38,000,000,  and  this  in  spite 
of  the  abandonment  of  the  internal  taxes  and  the  salt  duty,  and 
the  assumption  of  a  large  sum  for  the  payment  of  Louisiana. 
The  details  of  the  operation  are  illustrated  in  the  following 
table  in  millions  of  dollars :  — 


§57] 


Reduction  of  Debt. 


125 


Old  Debt 

Louisiana 

•0       <J 

3  t    « 

«i 

1 

« »o 

E 

Year 

3 

a 

V 

c 

C  >  t>  «n 

et?S« 

=  > 

-=    5 
U    U 

£  = 

.2  0 

V 

jj 

0 
D. 

E 

Jo. 

■3 

s 

3 

2 

■X. 

£ 

o*~  0 
fa       7, 

a 

<£ 

Q 

< 

0 

H 

1 801 

57.0 

2.8 

12.4 

7-2 

3-4 

83.0 

1802 

5S-9 

2.8 

11. 9 

7-2 

2-7 

80.7 

1803 

54-7 

2.7 

10.7 

7-2 

'•4 

77.0 

.804 

53-5 

1.8 

7-7 

7-2 

•9 

11. 2 

3-7 

864 

1 805 

52.2 

•9 

6.0 

7.2 

•7 

II-2 

3-7 

823 

1806 

50.8 

• 

4-2 

'•5 

757 

69.2 

1807 

49-3 

• 

6*4 

II. 2 

•5 

1808 

44-8 

* 

•4 

2-7 

56 

II. 2 

.2 

65.1 

1809 

37-4 

* 

.2 

7.8 

* 

II. 2 

• 

57-o 

1810 

36.1 

• 

5.6 

* 

II. 2 

* 

53-1 

1811 

34-7 

* 

1.8 

* 

II. 2 

* 

48.0 

1812 

33-2 

# 

•s 

1 1. 2 

• 

45-3 

*  Less  than  $100,000. 

The  foreign  debt,  including  the  stocks  of  1 795  which  were 
issued  as  a  substitute  in  place  of  a  portion  of  this,  and  the 
costly  loans  of  1  798  and  1800,  were  wiped  out,  and  no  further 
recourse  was  made  to  temporary  loans. 

Gallatin  had  little  respect  for  a  sinking  fund.  At  best  he 
thought  it  rendered  the  accounts  complex  and  embarrassed 
the  policy  of  debt  extinction ;  in  his  opinion  a  better  way  was 
to  apply  the  surplus  of  receipts  over  expenditures  directly  to 
the  discharge  of  debts.  In  spite  of  this  conviction,  he  did 
not  feel  prepared  to  abolish  the  sinking  fund,  which  had  been 
in  operation  for  more  than  a  decade  and  was  supported  by 
popular  opinion  because  believed  to  be  a  substantial  check 
on  the  treasury  department.  The  purpose  of  his  practical 
recommendations  was  to  increase  the  permanent  annual  ap- 
propriations for  the  use  of  the  fund  to  $7,300,000,  and  after 
the  Louisiana  purchase  to  $8,000,000.  The  significance  of 
this  legislation  lay  in  Gallatin's  perception  that  it  was  probable 
that  there  would  be  a  surplus  revenue  over  and  above  what 
was  necessary  to  meet  the  demands  of  the  sinking  fund  act 
of  1795,  and  this  he  desired  to  use  for  debt  reduction  beyond 
all    possible    claims    which    might    be    advanced   from    other 


126 


Economies  and  War. 


[§58 


quarters.  He  wished  especially  to  leave  no  unused  funds  for 
the  army  and  navy,  with  which  he  had  little  sympathy.  Owing 
to  the  abundant  revenue  of  the  period,  the  payment  of  the 
debt  went  on  with  a  rush,  for  which  the  good  luck  of  the 
country  is  entitled  to  credit  as  much  as  any  special  wisdom 
of  Jefferson  and  his  advisers. 

The  financial  experience  of  this  period  of  peace  is  summed 
up  in  the  following  table  in  millions  of  dollars  :  — 


Year 

Taxks 

CO 

3 
O 
4>    CO 

1  i 
1 

V 

3 
B 

> 
0 

O 

H 

1 
3 

•5 

c 

H. 

X 

H 

3 
"3. 

3 

Q 

■ 
E 
0 

3 

u 

-as . 

£  i 

3 

0 

■ 
E 

5 

0 
H 

1 801 
1802 
1803 
1804 
1805 
1806 
1807 
1808 
1809 
1810 
1811 

10.7 

12.4 
10.4 

1 1.0 

12.9 

14.6 

.5.8 
16.3 

8-5 
«3-3 

1.0 
.6 

.2 

•5 
.2 

12-3 

13.2 
10.7 

II. 2 
12.9 
14.6 

.5.8 
16.3 

7-2 
8.5 

133 

.6 
••7 
•3 
.6 
.6 
.8 

•5 
.6 

•5- 
.8 
1.1 

12.9 
14.9 
11.0 
11. 8 
13-5 
155 
16.3 
17.0 
7-7 
9-3 
14.4 

9-3 
7-9 
7-9 
8.6 
9.0 
94 
8-3 
9.0 
10.2 
8.4 
8.1 

3-6 
7.0 
3-i 
3-» 
4-5 
6.1 
8.0 
8.0 

•9 
6-3 

2-5 

58.    End  of  the  United  States  Bank. 

The  year  181 1  marks  not  only  the  end  of  the  peace  admin- 
istration but  also  the  winding  up  of  the  United  States  Bank. 
In  1808  the  directors  of  this  institution  memorialized  Congress 
for  a  renewal  of  the  charter,  and  the  subject  was  referred  to 
Gallatin,  who  made  an  elaborate  report,  March  2,  1809,  in 
favor  of  the  bank.  He  suggested  some  changes  by  which  it 
might  be  more  useful  to  the  government,  such  as  requiring  the 
payment  of  interest  on  government  deposits  when  in  excess 
of  $3,000,000,  and  the  adoption  of  a  regulation  that  the  bank 
should  loan  to  the  government  at  any  time  a  sum  not  to 
exceed  60  per  cent,  of  its  capital.  Gallatin  enumerated  the 
advantages  derived  by  the  government  from  the  bank,  in  its 


§  58]       End  of  the  United  States  Bank.      1 27 

safe-keeping  of  the  public  deposits,  in  the  collection  of  the 
revenues,  in  the  transmission  of  public  moneys,  in  the  facili- 
ties granted  to  importers,  and  in  loans  that  had  been  made  to 
the  government,  in  all  amounting  to  $6,200,000.  In  Congress 
there  was  strong  opposition  to  renewal  of  the  charter;  the 
numerous  State  banks  established  since  1790  had  a  diligent 
eye  to  their  own  interest.  In  1790  there  were  but  three  such 
banks  ;  in  1800  there  were  28  with  a  capital  of  $21,300,000, 
and,  in  181 1,  88  with  a  capital  of  $42,600,000. 

The  United  States  Bank  was  also  unpopular  because  of  the 
large  foreign  holdings  in  the  bank's  stock,  amounting  to  18,000 
shares  out  of  a  total  of  25,000  ;  this  use  of  foreign  capital  was 
construed  to  be  a  large  foreign  tribute  in  dividends ;  and, 
though  foreign  stockholders  could  not  vote,  indirectly  they 
could  exert  a  "  malignant  influence."  The  extravagant  char- 
acter of  this  opposition  was  summed  up  by  Senator  Qrawford 
in  the  following  language  :  "  The  member  who  dares  to  give 
his  opinion  in  favor  of  the  renewal  of  the  charter  is  instantly 
charged  with  being  bribed  by  the  agents  of  the  bank,  with 
being  corrupt,  with  having  trampled  upon  the  rights  and 
liberties  of  the  people,  with  having  sold  the  sovereignty  of 
the  United  States  to  foreign  capitalists,  with  being  guilty  of 
perjury  by  having  violated  the  Constitution."  The  constitu- 
tionality of  the  bank  was  once  more  questioned,  and  the  mere 
fact  that  Gallatin  and  his  followers  could  find  any  merit  at  all 
in  what  was  originally  regarded  as  a  federal  invention  only 
strengthened  the  purpose  of  some  of  the  Republicans  who 
held  grudges  against  the  administration. 

In  all  the  writings  and  speeches  called  forth  by  the  contest 
there  was  little  economic  analysis  or  criticism ;  the  bank  was 
regarded  as  an  undemocratic,  political  institution ;  or  as  an 
institution  helpful  in  centralizing  the  forces  of  a  weak  govern- 
ment. The  bill  for  renewal  was  finally  lost  in  the  Senate, 
February  20,  181 1,  by  the  deciding  vote  of  the  vice-president, 
George  Clinton.  It  then  became  necessary  for  the  government 
to  turn  to  local  banks   for  the  custody  of  its  funds.     In  181 2 


128  Economies  and  War.  [§  59 

twenty-one  local  institutions  were  employed,  chiefly  in  the 
principal  ports  of  entry,  so  that  the  collectors  might  have 
agents  at  command  with  whom  the  duty  bonds  of  importers 
were  placed  for  collection. 

59.    Inadequate  Preparation  for  "War. 

When  war  was  declared  in  June,  181 2,  although  there  had 
been  several  years  of  warning  during  which  preparation  might 
well  have  been  undertaken,  Congress  was  not  ready  with  a 
financial  policy  adequate  to  meet  the  extraordinary  demands. 
Little  had  been  accomplished  either  in  placing  the  army  and 
navy  upon  a  possible  war  footing  or  in  devising  fiscal  resources 
against  the  gathering  crisis.  Gallatin  had  given  some  atten- 
tion to  the  problem,  realizing  from  the  beginning  of  the 
strained  relations  that  war  with  England  was  possible  ;  but 
unfortunately  in  the  various  statements  of  his  views  during 
the  period  between  1807  and  181 2  he  wavered.  Un- 
doubtedly he  felt  the  pressure  of  the  unflagging  antagonism 
of  party  opponents,  who  wished  to  discredit  him  with  Jeffer- 
son, and  he  was  encouraged  by  temporary  revivals  of  better 
conditions  in  the  treasury. 

In  1807,  when  hostilities  first  appeared  imminent,  Gallatin 
outlined  the  financial  principles  which  ought  to  be  applied 
in  case  of  war ;  he  proposed  that  war  expenditures  should 
be  met  with  loans,  and  that  taxes  should  be  increased  only 
to  provide  for  the  annual  expenses  on  a  peace  establishment, 
the  interest  on  the  existing  debt,  and  the  interest  on  any  new 
loans.  Gallatin  arrived  at  this  opinion  on  the  theory  that 
maritime  war  in  the  United  States  would  deeply  affect  the 
resources  of  individuals,  commercial  profits  would  be  cur- 
tailed, and  the  surplus  of  agricultural  produce  would  fail  to 
reach  its  accustomed  foreign  market ;  such  losses  and  priva- 
tions he  was  not  willing  to  aggravate  by  taxes  beyond  what 
was  strictly  necessary.  For  the  increased  taxation  which 
would  be  required  Gallatin  suggested  a  revival  of  the  duty 
on  salt,  the    continuance   of  the   Mediterranean  duties,   and 


§  59]       Inadequate  Preparation  for  War.      I  29 

possibly  a  doubling  of  existing  import  duties.  The  excise 
duties,  "  however  ineligible,  will  doubtless  be  cheerfully  paid 
as  war  taxes  if  necessary." 

In  1808  Gallatin  took  away  much  of  the  pith  of  his  recom- 
mendations by  declaring  that  in  no  event  would  he  insist  on 
internal  taxes.  He  was  rejoiced  at  the  auspicious  conditions 
for  borrowing  money ;  the  high  price  of  public  stocks,  the 
reduction  of  the  public  debt,  the  unimpaired  credit  of  the 
general  government,  and  the  large  amount  of  existing  bank- 
stock  in  the  United  States  left  no  doubt  in  his  mind  that 
necessary  loans  could  be  had  on  reasonable  terms.  In  1809 
there  was  another  change ;  not  only  was  the  war  cloud  still 
threatening,  but  there  was  an  actual  deficiency  in  the  budget, 
hence  Gallatin  once  more  revived  the  possibility  of  internal 
duties  in  case  the  revenue  were  affected  by  war.  For  the 
present,  however,  he  recommended  only  the  continuation  of 
the  Mediterranean  duties,  unless  a  permanent  increase  in  the 
military  and  naval  establishments  were  contemplated. 

A  few  months  later,  February  26,  18 10,  in  response  to  a 
communication  from  the  committee  on  ways  and  means, 
Gallatin  again  elaborated  his  views,  placing  the  emphasis  upon 
credit  rather  than  on  taxation,  and  thus  developing  the  doc- 
trine of  war  financiering  which  is  associated  with  his  name. 
As  to  the  details  of  borrowing,  he  held  that  loans  might  be 
obtained  from  the  holders  of  the  old  6  per  cent,  stock, 
which  was  then  falling  due ;  from  the  banks  that  might  in 
this  way  find  a  use  for  funds  idle  because  commerce  was 
blocked ;  and  from  individuals  who  would  accept  public 
lands  as  collateral  security ;  lastly,  he  suggested  the  issue  of 
treasury  notes  bearing  interest  and  payable  in  one  year. 
Loans,  however,  were  to  be  relied  upon  for  war,  and  war 
only,  as  it  was  inconsistent  to  borrow  money  to  pay  ordinary 
running  expenses.  "  To  meet  these  loans  in  the  future  we 
must  depend  on  coming  prosperity  and  the  wisdom  of  suc- 
cessors ;  that  is,  favorable  circumstances  and  rigid  economy." 

Congress  easily  accepted  a  waiting  policy,  and  in  March, 

9 


i  30  Economies  and  War.  [§  59 

181 1,  authorized  a  loan  of  $5,000,000.  It  was  not  until. 
December  9,  181 1,  that  Gallatin  clearly  demanded  internal 
revenue  taxes.  For  this  change  of  opinion  he  held  Congress 
responsible  :  since  he  could  no  longer  borrow  from  the  United 
States  Bank,  the  government  was  denied  an  important  instru- 
ment of  credit.  A  proposition  for  excise  duties  coming  from  a 
Republican  secretary  was  an  invitation  for  a  party  squabble  ;  the 
committee  on  ways  and  means,  in  accordance  with  Gallatin's 
suggestion,  reported  a  schedule  of  duties.  A  warm  discussion 
took  place,  but  it  was  hard  to  persuade  Congress  of  the 
necessity  ;  although  a  deficit  was  disclosed  in  the  budget  and 
it  was  generally  agreed  that  war  would  take  place,  the  proposi- 
tion was  defeated.  It  was  late  in  the  day  to  educate  Congress 
to  a  strong  policy  of  taxation,  and  that  body  showed  its  dis- 
regard for  Gallatin's  advice  by  authorizing,  March  14,  181 2, 
another  loan  amounting  to  $11,000,000. 

In  spite,  then,  of  needs  which  were  early  apparent,  Congress 
determinedly  and  definitely  turned  away  from  a  policy  of 
adequate  taxation.  War  was  declared  in  June,  181 2;  for 
immediate  wants  an  issue  of  treasury  notes  to  the  amount  of 
$5,000,000  was  authorized  June  30,  and  customs  duties  were 
doubled  the  following  day.  This  latter  act,  however,  gave  but 
little  financial  comfort,  since  a  large  part  of  the  country's 
commerce  was  with  that  nation  which  now  became  a  public 
enemy ;  for  a  few  months  only  vessels  returning  home  paid 
the  increased  duties  on  their  cargoes,  and  thereafter  while  the 
war  lasted  this  source  of  revenue  shrank  to  less  than  one-half 
of  the  returns  in  the  previous  decade. 

With  the  recommendation  made  in  December,  181 1,  Gal- 
latin appears  to  have  left  the  responsibility  of  laying  excise 
duties  once  for  all  with  Congress,  for  in  his  annual  report  at 
the  end  of  181 2  after  war  was  declared  he  refrained  from 
renewing  the  recommendation.  If  therefore  the  government 
was  poorly  equipped  with  instruments  of  revenue,  the  respon- 
sibility lies  only  in  part  with  Gallatin  ;  he  had  wavered  in  his 
advocacy  of  internal  duties,  and  yet  in  a  final  judgment  of  his 


§  60]  Treasury  Administration.  131 

abilities  at  this  crisis  due  weight  should  be  given  to  the 
cliques  within  the  party  which  worked  for  his  downfall  and 
undoubtedly  led  him  at  this  time  to  rely  too  much  upon  hope 
and  credit,  instead  of  vigorously  and  continuously  insisting 
upon  the  needs  of  the  present. 

60.    Treasury  Administration,  War  Period. 

A  partial  explanation  of  the  failures  in  the  administration 
of  financial  affairs  during  the  war  of  181 2-1 814  will  be  found 
in  the  political  intrigues  within  the  Republican  party,  and 
particularly  in  the  factious  elements  found  in  Pennsylvania, 
Gallatin's  own  State.  Gallatin  clearly  recognized  the  strength 
of  this  opposition,  and,  wearied  with  the  contest,  tendered  his 
resignation  early  in  181 1  ;  he  could  not,  however,  be  spared, 
and  at  the  urgent  request  of  Madison  retained  his  post.  His 
enemies,  nevertheless,  did  not  cease  to  break  down  his  influ- 
ence, so  that  finally  in  May,  18 13,  in  the  very  midst  of  finan- 
cial distre'ss,  Gallatin  felt  it  wiser,  if  not  to  resign  outright, 
at  least  to  absent  himself  temporarily  from  political  affairs 
at  home.  He  consequently  undertook  a  diplomatic  mission 
and  left  the  management  of  the  treasury  to  William  Jones, 
secretary  of  the  navy. 

This  was  an  unfortunate  arrangement,  for  the  office  needed 
a  strong  man,  devoted  solely  to  financial  affairs;  it  was  no 
time  to  drift.  In  February,  18 14,  Gallatin  entered  upon 
another  diplomatic  service  and  definitely  resigned  from  the 
treasury.  Madison  then  turned  to  Alexander  J.  Dallas  of 
Pennsylvania,  a  lawyer,  independent  in  party  criticism,  a 
conservative,  and  friend  of  Gallatin.  For  these  reasons  he 
was  distasteful  to  the  radical  element  in  Pennsylvania,  and  was 
successfully  opposed  by  the  senators  of  that  State.  The 
appointment,  after  being  declined  by  Richard  Rush,  comp- 
troller in  the  treasury  department,  was  offered  to  George  W. 
Campbell  of  Tennessee.  Although  he  represented  the  admin- 
istration in  the  Senate,  he  brought  no  support  and  could  not 
command  the  confidence  of  capitalists;  he  proved  a  failure 


132  Economies  and  War.  [§  61 

and  held  office  but  a  few  months.  Dallas  was  again  nom- 
inated, and  the  opposition  in  the  Senate  being  overcome  by 
the  stress  of  public  affairs  he  was  confirmed  October  6,  18 14. 
Dallas  was  an  able  man,  but  the  evil  had  been  done  before 
his  opportunity  came ;  his  chief  work  lay  in  restoring  the 
currency  through  the  re-establishment  of  a  United  States 
Bank. 

61.    "War  Loans. 

As  the  war  was  sustained  on  public  credit  rather  than  by 
taxation,  it  is  appropriate  that  the  system  of  government  loans 
should  receive  first  consideration.  The  successive  phases  of 
the  loan  policy  and  their  relation  to  other  financial  measures 
may  be  seen  in  the  following  chronological  summary  :  — 

1812,  March  14 Six  per  cent  loan,  $11,000,000. 

1812,  June  12 War  declared. 

181 2,  June  30 Treasury  notes,  $5,000,000. 

1812,  July  1 Customs  duties  doubled. 

1813,  February  8 Loan,  $16,000,000. 

1813,  February  25 Treasury  notes,  $5,000,000. 

1813,  July  22  and  August  2   .     .  Internal  revenue  duties  and  direct  tax. 

1813,  August  2 Loan,  $7,500,000. 

1814,  March  4 Treasury  notes,  $10,000,000. 

1814,  March  24 Loan,  $25,000,000. 

18 1 4,  August Suspension  of  specie  payments. 

1814,  November  15 Loan,  $3,000,000. 

1814,  December  15 Internal  revenue  duties  increased. 

1 814,  December  24 Treaty  of  peace. 

1814,  December  26 Treasury  notes,  $10,500,000. 

181 5,  January  18 New  internal  taxes. 

181 5,  February  24 Treasury  notes,  $25,000,000. 

1815,  February  24 Seven  per  cent.  loan. 

As  already  indicated  Congress,  in  March,  181 2,  three 
months  before  war  was  declared,  authorized  a  loan  of 
$11,000,000  to  meet  a  probable  deficit  and  the  new  ex- 
penditures for  an  enlargement  of  the  army,  the  purchase  of 
ordnance  and  equipment,  the  erection  of  fortifications,  and 
the  construction  of  ships.  The  loan  bore  6  per  cent,  inter- 
est, and  in  accordance  with  the  usual  American  policy  none 
of  it   could  be  sold  under  par.     In  the  preliminary  debate 


§  6i]  War  Loans.  133 

some  members  severely  questioned  the  wisdom  of  throwing 
upon  the  market  so  large  an  amount  of  stock,  accompanied 
by  no  adequate  provision  for  paying  even  the  interest;  and 
doubted  whether  sufficient  moneyed  capital  available  for  loans 
really  existed  in  the  country  at  large.  A  considerable  part  of 
the  banking  capital  rested  upon  credit  instead  of  assets,  and 
was  of  such  a  character  that  its  holders  were  compelled  to 
manage  it  with  the  utmost  caution,  and  it  was  pointed  out  that 
in  case  of  war  much  of  the  country's  capital  would  be  turned 
to  manufactures,  which  would  offer  more  tempting  profits. 

The  government  on  the  whole  was  successful  in  placing  this 
first  loan,  but  as  further  demands  followed  the  real  situation 
was  revealed.  Public  credit  began  to  fail ;  and  in  making  the 
$  1 6,000,000  loan  of  February  8,  18 13,  it  became  necessary 
to  accept  bids  below  par.  It  was  with  difficulty  that  the 
negotiations  were  carried  out  at  all,  and  then  only  after  a 
second  opening  of  the  subscription  books  and  the  acceptance 
of  modifications  dictated  by  subscribers.  It  was  soon  dis- 
covered that  little  financial  support  could  be  expected  from 
the  Eastern  States,  —  largely  because  of  the  bitterness  of  the 
commercial  interests,  whose  prosperity  had  long  been  endan- 
gered by  Jefferson's  policy  of  embargo,  non-intercourse,  and 
finally  the  declaration  of  war.  The  subscriptions,  for  example, 
to  this  loan  were  geographically  as  follows  :  — 

States  east  of  New  York $486,700 

State  of  New  York     .          ....  5,720,000 

Philadelphia 6,858,400 

Baltimore  and  District  of  Columbia 2,393,900 

State  of  Virginia 187,000 

Charleston,  S.C 354,000 

$16,000,000 

New  England  carried  her  opposition  to  the  extreme  point ; 
of  the  $41,010,000  borrowed  by  the  government  exclusive 
of  treasury  notes  and  temporary  loans  up  to  the  end  of  18 14, 
she  contributed  less  than  $3,000,000.  The  government  also 
suffered  in  not  being  able  to  engage  the  co-operation  of  any 


134  Economies  and  War.  [§  61 

strong  banking  institution,  and  the  loss  of  the  United  States 
Bank  was  now  distinctly  felt. 

The  distress  of  the  treasury  was  also  manifest  in  the 
delayed  grant  to  the  executive  of  power  to  make  special 
terms  for  loans.  Up  to  this  time  government  securities  had 
not  been  sold  at  less  than  par,  although  in  one  instance  it 
had  been  necessary  to  offer  8  per  cent,  interest  to  se- 
cure subscriptions.  On  August  2,  1813,  however,  a  loan  of 
$7,500,000  was  authorized  on  condition  that  the  stock  be 
sold  for  not  less  than  88  per  cent.,  and  as  affairs  were  tempo- 
rarily in  a  somewhat  more  favorable  condition,  this  loan  was 
secured  at  an  average  rate  of  88%  per  cent.  The  loans  of  the 
next  year  were  negotiated  under  more  disadvantageous  terms, 
for  in  borrowing  the  first  instalment  of  the  $25,000,000  loan, 
under  the  act  of  March  24,  1814,  the  government  abandoned 
its  restrictions  and  was  forced  to  agree  that  if  more  favorable 
terms  were  extended  to  any  later  subscribers  equally  advan- 
tageous terms  be  extended  to  previous  purchasers.  In  this 
way  it  was  made  the  interest  of  every  holder  of  the  first  part 
of  the  loan  to  depress  the  price  of  government  securities  in 
order  to  secure  further  premiums  from  the  treasury.  Subscrip- 
tions were  received  at  1 2  per  cent,  discount ;  later  at  20  per 
cent. ;  and  still  later,  when  subscriptions  for  a  portion  were 
accepted  in  State  bank-notes  worth  but  65  per  cent,  in  specie, 
the  previous  subscribers  hastened  to  demand  supplementary 
stock  to  the  amount  of  the  difference  between  the  old  and  the 
new  discount.  At  the  close  of  the  war,  when  public  credit 
rose,  the  last  war  loan,  authorized  March  3,  18 15,  was  more 
successfully  negotiated  at  an  average  discount  of  little  less  than 
5  per  cent.  The  total  loss  to  the  government  in  disposing 
of  its  loans  during  the  war  period,  1812-1816,  was  enormous: 
in  1830  the  committee  of  ways  and  means  of  the  House  esti- 
mated that  for  loans  of  over  $80,000,000  the  treasury  received 
but  $34,000,000  as  measured  in  specie. 


§  62]  Issue  of  Treasury  Notes.  135 

62.    Issue  of   Treasury  Notes. 

Treasury  notes  were  issued  immediately  after  the  declaration 
of  war  in  the  summer  of  1 8 1 2 .  Following  a  suggestion  of  Gal- 
latin a  bill  was  reported  providing  for  a  block  which,  together 
with  the  amount  subscribed  for  the  loan,  should  not  exceed 
$11,000,000,  to  bear  interest  at  5%  per  cent.,  equal  to  one 
and  a  half  cents  per  day  on  one  hundred  dollars,  to  be  retired 
in  one  year  and  to  be  receivable  in  all  payments  due  the 
United  States.  The  proposition  did  not  go  unprotested ;  the 
usual  prophecy  of  depreciation  and  impaired  credit  was  made. 
In  favor  it  was  urged  that  the  proposed  interest-bearing  notes 
had  many  advantages  over  bank  paper :  they  rested  on  the 
credit  of  the  United  States  and  were  receivable  for  taxes  and 
public  dues ;  there  was  no  resemblance  between  them  and 
continental  money,  since  when  the  latter  was  issued  the  na- 
tional government  had  no  compelling  powers  over  the  States 
for  revenue  ;  now  its  credit  was  sound  and  its  power  to  raise 
revenue  unquestioned.  Though  not  secured  by  any  specific 
fund  set  apart  for  their  redemption, "the  entire  duties  and 
taxes  of  the  year  were  indirectly  pledged  for  this  purpose, 
since  the  notes  were  receivable  in  payment  of  such  duties  and 
taxes.  The  measure  passed  the  House  by  85  to  41,  and 
became  law  June  30,   181 2. 

If  the  issue  of  these  notes  had  been  stopped  at  this  point 
they  might  well  have  been  considered  a  kind  of  exchequer 
bills,  or  a  temporary  loan  to  anticipate  future  revenue,  since 
the  bills  were  payable  in  one  year  after  issue,  were  interest- 
bearing,  and  receivable  for  public  dues.  Even  the  conserva- 
tive Gallatin  declared  that  this  annual  anticipation  of  revenue, 
though  liable  to  abuse,  facilitated  both  the  collection  of  reve- 
nue and  the  making  of  loans  if  kept  within  strict  bounds. 
On  February  25,  18 13,  another  issue  of  $5,000,000  was 
voted ;  not,  however,  without  a  further  debate  in  which  the 
possibility  of  ill  was  duly  set  forth.  By  another  year  not 
so  much    self-restraint  was  displayed,  and  in   March,    1814, 


i36 


Economies  and  War.  [§  62 


$10,000,000  was  authorized;  and  later  in  December,  when 
the  needs  of  the  government  became  exceedingly  pressing  and 
loans  were  obtained  only  with  a  heavy  discount,  further  legis- 
lation was  enacted  under  which  $8,3 18,000  was  issued.  New 
arguments  were  now  discovered  in  favor  of  treasury  notes  ; 
they  were  held  more  desirable  than  stock  sold  at  a  ruinous 
discount.  Since  many  banks  had  suspended  specie  payments, 
and  the  country  was  in  monetary  disorder,  United  States 
treasury  notes,  receivable  everywhere  for  dues  and  customs 
and  guaranteed  by  the  United  States,  might  well  be  useful  in 
providing  a  more  stable  currency.  Even  Dallas,  the  new 
secretary  of  the  treasury,  presented  a  report  which  ap- 
proached an  endorsement  of  the  issue  of  legal-tender  notes. 
Influenced  by  these  considerations  Congress  passed  an  act, 
February  24,  181 5,  even  when  it  was  thought  a  treaty  of 
peace  had  been  signed,  authorizing  the  issue  of  $25,000, 000 
treasury  notes, — without,  however,  any  legal-tender  quality. 
By  this  time  opposition  to  the  issue  of  such  notes  had  been 
practically  silenced  ;  the  barriers  had  been  broken  down,  and 
if  the  war  had  continued  it  is  likely  that  many  of  the  abuses 
which  had  attended  the  issue  during  the  Revolutionary  War 
would  have  been  repeated.  The  notes  of  the  earlier  issues 
were  not  intended  to  be  currency,  but  in  the  last  act  no 
definite  provision  was  made  for  redemption,  and  all  notes 
issued  of  a  denomination  less  than  $100  bore  no  interest. 
The  total  amounts  issued  under  the  several  acts  were  as 
follows :  — 

Act  of  June  30,  1812 #5,000,000 

"     "  February  25,  1813 5,000,000 

"     "  March  4,  18 14 10,000,000 

"     "  December  26,  1814 8,318,400 

"     "  February  24,  181 5,  large  notes 4,969,400 

"     "         "         "      "      small  notes 3>392>994 

$36,680,794 

Not  all  of  these  notes,  however,  were  in  circulation  at  one 
time,  for  the  later  issues    in  part    were  used  to  replace  the 


§  6z]  Issue  of  Treasury  Notes.  I  37 

earlier   ones  which  were  promptly  redeemed.     The  amounts 
outstanding  on  January  1  each  year  were  as  follows  :  — 

1813 $2,835,500 

1814 4,907,300 

1815 10,646,480. 

1816 17,619,625 

1817 3.45°>°°o 

Since  these  were  the  first  issues  of  anything  like  paper 
money  by  the  United  States  under  the  Constitution  the 
characteristics  of  the  treasury  notes  deserve  special  notice  : 
(1)  Notes  issued  under  the  first  two  acts  were  in  denomina- 
tions of  not  less  than  §100;  under  the  next  two  in  denom- 
inations of  not  less  than  $20  j  and  under  the  last  from  $3 
upwards.  (2)  Notes  issued  under  the  first  three  acts  were 
not  originally  fundable  into  stock,  but  were  subsequently 
made  so  by  the  acts  of  December  26,  181 4,  and  February 
24,  1 8 15.  The  notes  of  18 15  were  made  fundable  by  the 
act  of  issue.  (3)  Notes  issued  under  the  first  four  statutes 
were  made  payable  in  one  year ;  under  the  last  at  no  fixed 
date.  (4)  All  save  the  small  treasury  notes,  which  were 
non-interest-bearing,  bore  interest  at  a  rate  of  5%  per  cent. 
(5)  None  of  the  notes  bore  a  formal  promise  to  pay  coin 
on  demand,  but  all  were  in  form  of  a  receipt  for  all  dues 
payable  to  the  government.  (6)  None  had  any  legal-tender 
qualities,  though  it  is  likely  that  such  notes  could  have  been 
issued  had  the  war  lasted  a  little  longer.  (7)  The  notes, 
with  the  exception  of  the  later  issues,  were  too  large  to  get 
into  general  circulation.  (8)  The  notes  remained  at  par  in 
specie  until  the  banks  generally  suspended  specie  payments 
in  August,  1814.  (9)  At  the  close  of  the  war  the  notes 
remaining  outstanding  were  rapidly  funded  into  interest-bear- 
ing stock. 

A  comparison  of  the  amounts  borrowed  by  years  1812-1816, 
distinguishing  between  the  long-term  loans  and  treasury  notes, 
with  the  net  increase  in  debt  each  year  according  to  Bayley's 
tables,  is  shown  in  the  following  table  in  millions  of  dollars  :  — 


i38 


Economies  and  War. 


[§63 


Year 

Loans 

Treasury  Notbs 

Total 

8 
3 

B 
0 

3. 
B 

«J 

•0 

CU 

3 

■ 

B 

CO 

B 

3 

c 

3. 
g 

•a 

0 

a 
I 

D 

c 

60 

3 

s 
0 

§ 
•0 
(2 

a 

1812 
.8.3 
1814 
,815 
1816 

12.7 
22.9 
•  8.3 
22.7 
7.8 

5-6 
4.0 
»-7 
3-4 
3.0 

7-' 
18.9 
16.6 
19-3 

4.8 

2.8 

6.1 

8.3 

15.2 

4-2 

5-8 

2-7 

9-7 

2.8 
6.1 
24 
12.5 

'5-5 
29.0 
26.6 

37-9 
12.0 

5.6 
4.0 

7-5 
6.1 
12.7 

9-9 
25.0 
19.1 
3'-8 
•71 

1  Decrease. 


63.    Internal  Revenue  Taxes  ;  Other  Taxes. 

One  reason  why  Congress  did  not  in  181 2  enter  upon  in- 
ternal taxation  promptly  and  vigorously  was  the  difficulty  of 
framing  the  details  of  a  new  schedule  of  duties.  Notwith- 
standing the  urgency,  a  large  part  of  the  long  discussion  in 
the  spring  of  181 2  over  a  bill  to  levy  taxes  on  spirits  was 
devoted  to  the  inconsequential  question  whether  the  tax  on 
distilled  spirits  should  be  levied  upon  the  stills  or  should  be 
a  gallon  tax.  Although  war  was  upon  the  country  the  settle- 
ment of  this  detail  was  regarded  by  some  members  as  involv- 
ing a  momentous  principle ;  in  favor  of  a  tax  on  stills  it  was 
urged  that  fewer  offices  would  serve,  oaths  might  be  dispensed 
with,  houses  and  cellars  of  distilleries  would  not  be  searched, 
and  the  firesides  of  the  people  would  not  be  invaded  by  excise 
officers.  On  the  other  hand  the  proposed  tax  on  stills  would 
yield  only  $275,000,  a  sum  altogether  insignificant  in  view  of 
immediate  needs  ;  it  would  equal  hardly  a  cent  a  gallon  as 
compared  with  7.18  cents  per  gallon  levied  during  the  admin- 
istration of  Washington.  The  question  of  a  whiskey  excise 
was  also  complicated  by  the  proposition  to  impose  a  tax  upon 
land,  and  some  Western  merchants  thought  each  of  these 
would  bear  more  hardly  upon  the  people  of  that  region,  who 
were  the  least  able  to  contribute.  The  evils  of  an  excise  sys- 
tem were  depicted  in  vivid  colors ;  nevertheless  the  West 
expressed  its  willingness  to  incur  the  responsibility  of  a  tax 


§63]  Internal  Revenue  Taxes.  139 

on  stills  rather  than  to  defeat  the  great  work  in  which  the 
nation  was  engaged.  The  House  of  Representatives  could 
not  bring  itself  to  the  passage  of  any  measure  at  that  time,  and 
in  June,  181 2,  postponed  the  whole  subject  by  a  vote  of  72 
to  46. 

During  the  winter  of  181 2-1 8 13  the  question  of  internal 
revenue  taxation  was  again  raised,  but  time  for  consideration 
was  then  limited.  The  taunt  by  Mr.  Cheves  expressed  the 
truth  :  "  It  was  said  last  session  that  you  would  have  time  to 
lay  internal  revenue  duties  at  this  session,  but  I  then  said  it 
was  a  mistake.  You  now  find  this  to  be  the  fact.  By  your 
indecision  when  the  country  was  convinced  they  were  neces- 
sary you  have  set  the  minds  of  the  people  against  taxes.  But, 
were  it  otherwise,  you  have  not  time  now  to  lay  them  for  the 
next  year."  In  the  summer  of  18 13  the  president  called  Con- 
gress together  for  a  special  session,  and  the  administration 
insisted  upon  the  need  of  further  taxation.  A  direct  tax  of 
$3,000,000  was  immediately  enacted  to  be  assessed  for  the  first 
time  in  18 14,  and  Congress  laid  duties  on  carriages,  a  duty  on 
refined  sugar,  a  license  tax  upon  distillers  of  spirituous  liquors, 
stamp  duties,  an  auction  tax,  and  a  license  tax  upon  retailers 
of  wines  and  spirituous  liquors.  The  duties  imposed,  however, 
were  not  high  ;  outside  of  the  direct  taxes  a  revenue  of  only 
$2,000,000  was  expected,  and  no  advantage  could  be  derived 
from  the  direct  tax  until  the  second  year. 

Congress  was  again  assembled  in  special  session  in  Septem- 
ber, 1 814,  to  replenish  an  exhausted  treasury  and  to  restore 
public  credit.  Existing  internal  duties  were  increased  and 
duties  rendered  permanent  as  follows:  (1)  the  direct  tax 
was  doubled  to  $6,000,000,  to  be  assessed  annually;  (2)  the 
duty  on  carriages  was  raised ;  (3)  the  tax  on  distillers  of 
spirituous  liquors  was  continued  and  a  tax  on  distilled  spirits 
was  added;  (4)  duties  on  sales  at  auction  and  on  licenses  to 
retailers  of  wines  and  spirituous  liquors  and  foreign  merchan- 
dise were  raised;  (5)  rates  of  postage  were  raised  50  per 
cent. ;    (6)   in  addition  new  duties  were  imposed  on  certain 


140 


Economies  and  War. 


[§63 


manufactured    articles    made    in   the    United   States   and    on 
certain  articles  in  use,  as  household  furniture  and  watches. 

Although  effective  supplies  were  thus  tardily  granted  and 
did  not  become  available  until  the  closing  years  of  the  war, 
they  proved  of  welcome  assistance  in  the  restoration  of  the 
disordered  finances.  There  was  great  delay  in  the  collection 
of  these  duties,  and  for  years  after  the  repeal  of  the  taxes 
returns  into  the  treasury  from  this  source  find  an  entry  in  the 
budget.  The  amounts  accruing  and  the  duties  actually  re- 
ceived from  the  internal  duties  (as  estimated  in  a  report  of 
the  committee  on  ways  and  means,  December  9,  181 7)  were 
as  follows  :  — 


Year 

Accrued 

Collected 

1814 
1815 
1816 
1817 

$3,262,197 
6,242,504 

4>6?3.79Q 
3,002,000 

$1,910,995 

4.97°.53° 
5,281,111 
3,000,000 

Total 

$17,140,500 

$15,168,636 

The  annual  cost  of  collection  was  high,  varying  from  7.8  to 
4.8  per  cent.  The  most  productive  of  the  excise  duties  were 
those  on  distilled  spirits,  the  licenses  for  stills  and  retailers, 
and  on  auction  sales.  The  system  was  not  long  enough  in 
force  to  become  effective  in  its  administration  or  to  afford  the 
treasury  officers  definite  data  for  reliable  estimates.  This 
latter  difficulty  was  increased  by  the  fact  that  there  was  too 
little  general  information  at  that  time  in  regard  to  public  re- 
sources or  industrial  conditions. 

The  three  direct  taxes  imposed,  with  collections,  were  as 
follows :  — 


Year 

Imposed 

Collected 

1814 
18.5 
1816 
1817 

$3,000,000 
6,000,000 
3,000,000 

$2,219,497 
2,162,673 
4.253.635 
1,834,187 

$2,000000 
0 

$20,000000 
18,000000 
16,000000 
14,000000 
12,000000 
10,000000 
8,000000 
6,000000 
4,000000 
2,000000 


INDIANS 


WAR 

^^ 

1 — 1 

1 

$3,000000 

6,000000 

4,000000 

2,000000 

0 


- 

NAVY 

— 1 

""     ~^ iT\-_~----^---T/r    T*i — n 

1   1   1   1    Mi 1   1       Mil 

$8,000000 

6,000000 

4,000000 

2,000000 

0 


-      INTEREST 

'  "™l — ^-i 

( 

~"""~           .^^ 

• 

"7 — --^_ 

$4,000000^      pENsioNS 

2.00000C  r- 
0 


$6,000000  l      MISCELLANEOUS 

4,000000 


1810  1112  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  29  30  31  32  33  34  35 


No.   II.  — ORDINARY   EXPENDITURES,    1810-1835. 

(Continuation  of  Chart  No.  1,  different  scale.) 


§  64]  Expenditures  and  Receipts. 


141 


These  taxes  were  apportioned  among  the  States  on  the 
census  of  1810,  and  the  first  act  went  so  far  as  to  apportion 
to  each  county  in  the  several  States  the  amount  it  should  pay, 
thereby  creating  great  inequalities.  To  avoid  this  evil  the 
second  act  did  not  attempt  to  apportion  the  quotas  among 
the  counties,  but  left  it  to  the  States  to  equalize  the  burdens 
in  the  several  collection  districts.  In  view  of  the  infrequent 
attempts  throughout  our  history  to  levy  a  direct  tax,  it  is  sug- 
gestive to  note  that  the  several  assessments  made  upon  the 
States  were  met  with  a  fair  degree  of  exactitude  and  prompt- 
ness. If  there  was  an  unequal  incidence,  there  was  little 
grumbling,  thus  showing  a  distinct  advance  from  the  disastrous 
policy  of  requisitions  under  the  Confederacy. 

As  soon  as  the  war  was  over  prompt  efforts  were  made  to 
repeal  the  internal  revenue  duties.  Dallas,  who  did  not  ap- 
prove such  a  sweeping  measure,  declared  that  there  was  a 
sufficient  scope  for  the  operation  of  a  permanent  system  of 
internal  duties,  and  recommended  at  least  the  retention  of  the 
licenses  on  distilleries  and  retailers,  the  duty  on  refined  sugar 
and  the  stamp  duties.  For  the  time  being  Congress  followed 
this  advice,  but  when  President  Monroe,  in  his  first  annual 
message  in  December,  181 7,  in  deference  to  popular  pressure 
recommended  their  repeal,  a  measure  to  that  effect  was  quickly 
passed. 

64.    Expenditures  and  Receipts,  1812  - 1815. 
Although  the  war  was  over  early  in  181 5,  the  military  and 


naval   expenditures    continued    heavy    throughout    1 8 1 6  ; 
years  the  expenditures,  1812-1815,  were  as  follows:  — 


by 


Year 

War 

Navy 

Interest  on 
debt 

Miscella- 
neous l 

Total 

1812 
1813 
1814 
1815 

$11,817,000 
19,652,000 
20,350,000 
14,794,000 

$3,959.  °oo 
6,446,000 
7,311,000 
8,660,000 

$2,451,000 

3.599,00° 
4,593,000 
5,990,000 

$2,052,000 
1,983,000 
2,465,000 
3.499.000 

$20,280,000 
31,681.000 
34,720.000 
32,943,000 

1  Including  Indians  and  peusions. 


142 


Economies  and  War. 


[§64 


The  outgo  during  these  four  years  was  nearly  as  much 
as  in  the  preceding  twenty;  the  net  results  of  this  financial 
experience  is  seen  in  the  following  table  in  millions  of 
dollars :  — 


Taxes 

3 
O 
V  trt 

re  - 

3 

■ 

0» 

E 
3 

<0 

jj 

Year 

E 

0 

SS  3 

"re 

J! 

"re 

C 
■ 

a 

M 

U 

M  B 

Q 

H 

s 

H 

W 

0 

1812 

8.9 

8.q 

0.8 

08 

20.2 

10.4 

1813 

>3-2 

13.2 

I.I 

M3 

31.6 

•7-3 

1814 

6.0 

1.6 

22 

9.8 

1-3 

ii. 1 

34.7 

23.6 

1815 

7-3 

4-7 

2.1 

14. 1 

••5 

13b 

32.9 

'7-3 

A  comparison  of  the  deficits  and  increase  of  debt  during 
this  period  shows  an  excess  of  over  $13,000,000  of  money 
borrowed  above  what  was  actually  needed ;  as  a  result  the 
treasury  began  the  year  1816  with  the  largest  balance  to  its 
credit  since  the  organization  of  the  government. 


CHAPTER  VII. 
PROBLEMS  OF  REORGANIZATION  AFTER  WAR. 

65.     References. 

Bibliographies:  Bogart   and  Rawles,  29-31;  Charming   and   Hart, 

356-3  59- 

Bank  and  Currency  Reform  :  (i)  Sources,  American  State  Papers, 
Finance,  II,  872  (Dallas,  report  on  banking,  Nov.  27,  1814) ;  891  (Madi- 
son's veto)  ;  III,  57-61  (plan  of  Dallas,  Dec.  24,  1815);  306-391  (report 
on  Bank,  Jan.  16,  1819) ;  Clarke  and  Hall,  Documentary  History  of  the 
Bank,  472-713,  781-795  (Marshall's  opinion  in  McCulloch  v.  Mary- 
land); Messages  of  the  Presidents  (Richardson  ed.),  I,  555  (Madison's 
veto);  Statutes,  III,  266;  or  Dunbar,  80;  or  W.  MacDonald,  Select  Docu- 
ments, 207;  Finance  Reports,  II,  481-513  (Crawford's  report  on  cur- 
rency,   Feb.    12,  1820;  valuable);  or    American    State  Papers,   Finance, 

III,  494;  A.  Gallatin,  Writings,  III,  282-287;  H.  Clay,  Speeches,  I, 
74-80  (ed.  1857);  J.  C.  Calhoun,  Works,  II,  153-162  (ed.  1853); 
D.  Webster,  Works,  III,  35-59  (ed.  1851);  J.  B.  Thayer,  Cases 
on  Constitutional  Law,  271-285,  1340-1346.  (ii)  SPECIAL:  Bolles,  II, 
278-283,317-326,359-374;  L.  C.  Root  in  Sound  Currency,  IV,  No.  17 
(Sept.,  1897);  C.  A.  Conant,  History  of  Modern  Banking,  294-301 ;  H. 
White,  271-281 ;  W.  Gouge,  History  of  Paper  Money,  II,  55-121  ;  W.  G. 
Sumner,  History  of  Banking,  I,  63-190 ;  R.  C.  H.  Catterall,  The  Second 
Bank  of  the  United  States,  1-92  (foot-notes);  W.  G.  Sumner,  American 
Currency,  79-84  (disorders  in  1819).  (iii)  General:  W.  G.  Sumner, 
Life  of  Jackson,  231-235;  J.  A.  Stevens,  Gallatin,  270-275;  H.  Adams, 
History  of  U.  S.,  VIII,  249-251,  257-261 ;  IX,  56,82,  106-111,  116-118; 
McMaster,  IV,  281-308  (local  banks),  309-318  (organization  of  Bank), 
484-490  (banking  disorders),  495-505  (taxation  of  the  Bank);  Schouler, 
II,  447-449;  III,  109-119  (difficulties  in  1819). 

Resumption  of  Specie  Payments  :  American  State  Papers,  Finance, 

IV,  132  (report  of  Dallas) ;  Statutes,  III,  343  (resolution,  April  30,  1816). 
or  Dunbar,  9$;  A.  Gallatin,  Writings,  III,  287-293;  Bolles,  II,  318-322; 
H.  Adams,  History  of  U.  S.,  IX,  118-119,  128-132. 

Tariff  of  1816:  American  State  Papers,  Finance,  III,  32-35,  52-54, 
82-85  (memorials),  85-99,  103-107  ;  E.  Young,  Customs  Tariff  Legislation, 
xxxvii-xl ;  Statutes,  III,  310;  Bolles,  II,  284-293,  359-366;  O.  L.  Elliott, 
The  Tariff  Controversy,  137-192;  F.  W.  Taussig,  Tariff  History,  29-31, 

H3 


144  Reorganization  after  War.  [§66 

40,50;  Calhoun,  Works,  II,  163-173;  R.  Hildreth,  582-588,  630;  H. 
Adams,  History  of  U.  S.,  IX,  111-116;  McMaster,  IV,  319-343;  Stan" 
wood,  I,  134-162. 

Payment  of  Debt:  Finance  Reports,  II,  251  (1823),  282  (1824),  316 
(1825) ;  American  State  Papers,  Finance,  III,  800  (report,  April  15,  1822, 
retrenchment  of  expenditures) ;  Statutes,  III,  379  (sinking-fund  act, 
March  3,  1817) ;  or  Dunbar,  97  ;  Holies,  II,  303-316,  523-526;  J.  W. 
Kearny,  Sketch  of  American  Finances,  III,  150;  E.  A.  Ross,  Sinking 
Funds,  in  Pub.  Amer.  Econ.  Assn.,  VII,  70-76. 

Loans:  Bayley,  355-360;  W.  F.  de  Knight,  57-61. 

66.    Currency  Disorder. 

Upon  the  advent  of  peace  the  most  important  task  was  the 
re-establishment  of  the  currency  on  a  sound  specie  basis. 
When  Congress  refused  to  re-charter  the  United  States  Bank 
in  181 1  the  field  was  left  free  for  State  banking,  and  the  op- 
portunity was  eagerly  seized.  Between  181 1  and  1816  the 
number  of  these  institutions  rose  from  88  to  246.  Many  were 
organized  with  almost  no  restrictions ;  at  best  there  were 
serious  defects,  for  there  was  little  past  experience  to  guide 
either  the  legislatures  which  had  the  power  of  incorporation 
or  the  bank  managers ;  and  there  was  no  organized  system  of 
intelligence  which  would  insure  prompt  publicity  as  to  the 
condition  of  banks  distributed  over  the  wide  area  of  country. 
War  always  brings  a  demand  for  new  credit,  and  under  this 
stimulus  the  notes  of  the  banks  were  unduly  expanded ; 
the  loose  credit  system  of  selling  public  lands  in  the  West 
led  to  inflation;  and  this  movement  was  hastened  because 
after  the  suspension  of  specie  payments  in  August,  18 14,  the 
government  accepted  State  bank-notes  in  the  payment  of  public 
dues,  —  hence  the  bank-note  circulation  increased  from 
$45,000,000  in  1812  to  $100,000,000  in  1817. 

Besides  meeting  mercantile  demands  for  credit,  the  banks 
found  a  tempting  field  for  investment  of  their  note  issues  in 
government  loans.  The  banks  were  drawing  interest  on  this 
stock ;  they  used  it  for  discounting  purposes  and  they  also 
profited  by  its  gradual  rise  in  the  investment  market.  The 
result  was  embarrassing,  for  if,  as  sometimes  happened,  banks 
with  small  general  resources  took  the  loans  of  the  government 


§67]  Second  United  States  Bank.  145 

payable  in  twelve  years  and  issued  their  own  notes  payable  on 
demand,  the  banks  had  nothing  but  government  stock  to  meet 
the  notes  when  presented  for  payment,  and  this  asset  they  were 
not  always  able  to  turn  into  cash.  Coupled  with  the  expansion 
of  bank-note  circulation  was  the  withdrawal  of  a  large  amount 
of  specie  from  the  country  ;  the  dissolution  of  the  United  States 
Bank  alone  caused  the  export  of  $7,000,000  which  had  been  in- 
vested by  Europeans  in  its  stock.  The  drain  of  specie  was 
most  marked  from  the  banks  of  the  Middle  and  Southern 
States,  so  that  when  Washington  was  captured  by  the  British  in 
1 8 14  all  banking  institutions  except  in  New  England,  where 
more  conservative  methods  prevailed,  were  forced  to  suspend 
specie  payments.  The  disorder  of  the  currency  naturally 
disturbed  the  operations  of  the  treasury ;  imports  sought  the 
ports  where  the  currency  was  the  most  debased  ;  and  Phila- 
delphia and  Baltimore  thus  enjoyed  a  greater  apparent  pros- 
perity than  Boston.  In  the  latter  city  it  was  necessary  to 
make  large  disbursements,  while  the  revenue  receipts  were 
diverted  to  the  Southern  ports.  The  direct  loss  to  the 
government  from  poor  or  worthless  bank-notes  received  dur- 
ing the  four  years,  18 14-18 17,  amounted  to  over  $5,000,000. 
The  monetary  derangement  was  so  acute  that  the  treasury 
department  was  obliged  to  keep  four  accounts  with  its  de- 
positories in  four  standards  of  value  :  cash  or  local  currency  ; 
treasury  notes  bearing  interest ;  treasury  notes  not  bearing 
interest ;  and  special  deposits. 

67.    Establishment  of  the  Second  United  States  Bank. 

An  important  part  of  the  vigorous  policy  outlined  by  Dallas 
when  he  took  charge  of  the  treasury  department  in  1814 
was  the  establishment  of  another  United  States  Bank.  For 
this  there  were  two  reasons  :  at  first  emphasis  was  placed  upon 
the  advantage  which  the  bank  would  afford  in  supplying 
financial  resources  to  an  embarrassed  treasury  ;  and  later  it  was 
held  indispensable  for  the  restoration  of  a  national  currency. 
Dallas  appropriately  recognized  the  services  of  a  few  of  the 


1 46  Reorganization  after  War.  [§  67 

State  banks  during  the  war ;  but  declared  that  "  the  charter 
restrictions  of  some  of  the  banks,  the  mutual  relation  and  depend- 
ence of  the  banks  of  the  same  State,  and  even  of  the  banks  of  the 
different  States,  and  the  duty  which  the  directors  of  each  bank 
conceive  they  owe  to  their  immediate  constituents  upon  points 
of  security  or  emolument,  interpose  an  insuperable  obstacle  to 
any  voluntary  arrangement  upon  national  considerations  alone 
for  the  establishment  of  a  national  medium  through  the  agency 
of  the  State  banks."  In  Dallas'  view  a  national  bank  could 
conciliate,  aid,  and  lead  State  banks  in  the  restoration  of  the 
currency  to  a  specie  basis;  the  government  in  turn  would 
find  its  benefit  in  the  rise  of  value  of  public  securities  and  in 
increased  confidence  in  the  treasury  notes. 

Constitutional  objections  to  a  bank  reappeared,  but  President 
Madison,  Secretary  Dallas,  and  the  legislative  leaders  agreed  in 
putting  that  argument  aside  and  devoting  attention  to  the 
financial  and  economic  elements  involved  in  the  question  at 
issue.  For  a  time  it  was  impossible  for  the  advocates  of  a 
bank  to  agree  on  details  which  they  could  all  support ;  hence 
a  brief  discussion  of  the  various  projects  brought  forward  is 
desirable  in  order  to  illustrate  the  conflicting  state  of  public 
opinion,  although  not  one  of  them  was  finally  adopted  in  its 
entirety.  Three  distinct  and  often  conflicting  purposes  stood 
out  in  the  debates  :  the  need  of  a  bank  to  give  financial  support 
to  the  government ;  the  fear  of  governmental  participation  in 
banking ;  and  the  necessity  of  properly  securing  the  note  cir- 
culation, —  ideas  which  were  the  key-notes  of  similar  discussion's 
during  the  next  twenty-five  years.  Dallas  originally  proposed 
(in  a  report,  October  17,  1814)  a  bank  with  a  capital  of 
$50,000,000 ;  recognizing,  however,  that  it  would  be  impos- 
sible to  secure  so  large  a  subscription  in  coin,  he  advised 
that  of  the  $50,000,000  but  $6,000,000  be  subscribed  in 
specie,  and  the  remainder  in  government  stock  and  treasury 
notes.  Provision  was  made  that  the  government  should  hold 
stock  in  the  bank,  and  that  the  bank  should  lend  $30,000,000 
to  the  government ;  and  in  the  bill  reported  in  the  House  from 


§67]  Second  United  States  Bank.  147 

the  committee  on  ways  and  means,  November  7,  the  president 
was  given  discretionary  power  to  allow  suspension  of  payment 
of  specie  by  the  bank.  The  chief  purpose  of  this  plan  was  to 
secure  loans  to  the  government ;  the  capital  of  the  bank  was  to 
consist  largely  of  government  credit  in  the  shape  of  stock,  and 
in  return  the  bank  was  not  absolutely  bound  down  to  pay  on 
demand  its  obligations  outstanding  in  the  form  of  circulating 
notes. 

Calhoun  objected  to  a  financial  partnership  of  this  character 
in  which  the  government  would  borrow  back  its  own  credit, 
and  in  a  second  plan  proposed  that  the  government  should 
use  its  own  credit  directly  without  the  intervention  of  a  bank, 
—  that  one-tenth  of  the  capital  should  be  in  specie  and  the 
remainder  in  treasury  notes  to  be  thereafter  issued ;  beyond 
this  indirect  relation  the  United  States  was  to  have  no 
stock  in  the  bank,  no  control  over  its  operations,  and  no 
power  to  suspend  specie  payments.  This  plan  would  give 
support  to  treasury  notes  to  the  disadvantage  of  government 
stock,  but  as  treasury  notes  by  this  time  had  many  friends  it 
was  for  the  moment  favored  by  the  House.  Dallas  came  out 
strong  in  opposition,  because  the  fresh  issue  of  treasury  notes 
would  gratuitously  give  an  advantage  to  a  single  class  of  cred- 
itors and  would  tend  to  depreciate  the  value  of  the  rest  of 
the  public  debt ;  more  than  that  he  held  that  it  would  be 
extremely  difficult  to  get  $45,000,000  of  treasury  notes  into 
circulation,  either  with  or  without  depreciation.  In  later  years 
Calhoun  had  to  meet  repeatedly  the  charge  of  inconsistency 
for  his  support  at  this  time  of  a  federal  banking  institution. 
His  answer  was  always  frank  :  he  supported  a  national  bank 
as  an  instrument  of  compulsion  to  force  the  local  banks  to 
resume  specie  payments  ;  distrust  of  the  State  banks  led  him 
to  waive  for  the  time  being  his  political  philosophy. 

In  the  course  of  the  debate  (December  29,  18 14)  Webster 
proposed  still  a  third  plan,  —  a  bank  with  a  capital  of 
$30,000,000,  with  no  obligation  on  the  part  of  the  bank  to 
loan  money  to  the  government,  with  no  permission  to  suspend 


148  Reorganization  after  War.  [§67 

specie  payments,  and  with  a  penalty  on  a  refusal  by  the  bank 
to  redeem  its  notes.  In  support  of  his  measure  Mr.  Webster 
delivered  an  instructive  speech  :  he  thought  that  the  advantages 
to  result  from  a  bank  were  overrated ;  for  banks  are  not 
revenue ;  the  foundations  of  revenue  must  be  sunk  deeper ; 
and  the  principal  good  from  a  bank  was  in  the  future,  not  in 
the  present.  The  bank  proposed  by  Calhoun  seemed  to  him 
most  extraordinary  and  alarming  ;  with  a  capital  of  $5,000,000 
in  specie  and  $45,000,000  in  government  notes,  such  an  in- 
stitution looked  less  like  a  bank  than  a  paper-money  depart- 
ment of  the  government :  "  the  government  is  to  grow  rich 
because  it  is  to  borrow  without  the  obligation  of  repaying,  and 
it  is  to  borrow  of  a  bank  which  issues  paper  without  liability 
to  redeem  it." 

The  first  bill  passed  was  along  the  lines  suggested  by 
Webster ;  the  capital  authorized  was  $30,000,000,  of  which 
the  United  States  might  subscribe  $5,000,000  in  government 
stock;  of  the  private  subscription  of  $25,000,000  one-half 
was  to  be  in  treasury  notes,  one-third  in  stock,  and  one-sixth 
in  coin.  No  loan  was  to  be  made  to  the  government  exceeding 
$500,000  ;  the  bank  could  not  purchase  government  indebted- 
ness ;  and  no  permission  was  given  to  suspend  specie  pay- 
ments. This  bill  did  not  meet  the  approval  of  Secretary  Dallas, 
and  was  vetoed  by  President  Madison,  January  30,  1815,  for  the 
following  reasons  :  the  amount  of  the  stock  to  be  subscribed 
would  not  be  sufficiently  in  favor  of  the  public  credit  to  cause 
any  considerable  or  lasting  elevation  of  the  market  price  of 
government  stock ;  the  people  would  reap  no  adequate  bene- 
fits, since  the  bank  was  free  from  all  legal  obligations  to  make 
loans  to  the  government ;  and  the  bank  as  constituted  would 
not  provide  a  sufficient  circulating  medium,  for  it  would  be 
obliged  to  pay  its  notes  in  specie  or  be  subject  to  loss  of  its 
charter.  In  brief,  Madison's  objection  was  that  the  bank  as 
proposed  would  fail  to  provide  a  reliable  circulating  medium, 
or  to  furnish  loans  to  the  government  in  return  for  its  franchise. 

In  December,  18 15,  Secretary  Dallas  again  placed  the  sub- 


§67]  Second  United  States  Bank.  149 

ject  before  Congress,  with  some  modification  of  his  previous 
propositions :  he  now  recommended  a  bank  with  a  capital 
of  but  $35,000,000,  to  consist  three-fourths  of  government 
stock  (with  no  mention  of  treasury  notes)  and  one-fourth  of 
specie ;  instead  of  demanding  that  the  bank  make  loans  to 
the  United  States  it  was  under  obligation  to  pay  a  bonus  to  the 
government  in  return  for  the  benefits  of  its  charter ;  and,  finally, 
he  insisted  that  no  opportunity  should  be  given  for  a  suspension 
of  specie  payments  in  case  of  emergency.  In  accordance  with 
these  principles  a  bill  was  introduced  early  in  18 16.  Calhoun 
gave  his  support,  together  with  a  violent  attack  upon  State 
banks,  which  he  accused  of  circulating  $170,000,000  of  bank- 
notes on  not  more  than  $15,000,000  of  specie  in  their  vaults. 
"  The  metallic  currency  has  left  our  shores,"  said  he  ;  "  we  have 
treated  it  with  indignity ;  it  leaves  us  and  seeks  a  new  asylum 
on  foreign  shores."  Smith  of  Maryland  coincided  with  Calhoun 
that  a  bank  was  necessary  but  resented  the  attack  upon 
the  State  institutions  ;  during  the  war,  he  said,  "  they  had  been 
the  pillars  of  the  nation,  now  they  were  the  caterpillars." 
John  Randolph  opposed  the  bill  specifically  and  in  general. 
A  bank  "  would  be  an  engine  of  irresistible  power  in  the  hands 
of  any  administration ;  it  would  be  in  politics  and  finance 
what  the  celebrated  proposition  of  Archimedes  was  in  physics, 
—  a  place,  the  fulcrum,  from  which  at  the  will  of  the  executive 
the  whole  nation  could  be  hurled  to  destruction."  "Every 
man  present  in  the  House  or  out  of  it,  with  some  rare  excep- 
tions, was  either  a  stockholder,  president,  cashier,  clerk,  or  door- 
keeper, runner,  engraver,  paper- maker,  or  mechanic  in  some  way 
or  other  to  a  bank."  "  It  was  as  much  swindling  to  issue  notes 
with  the  intent  not  to  pay  as  it  was  burglary  to  break  open  a 
house."  "  But  a  man  might  as  well  go  to  Constantinople  to 
preach  Christianity  as  to  get  up  here  and  preach  against 
banks."  Clay,  then  speaker  of  the  House,  favored  the  bank, 
although  formerly,  when  a  member  of  the  Senate,  he  had 
opposed  the  renewal  of  the  charter  of  the  first  bank.  In 
explanation  he  assigned  his  former  opposition  to  three  causes ; 


150  Reorganization  after  War.  [§68 

first,  he  had  been  instructed  to  oppose  the  charter  by  the  legis- 
lature of  his  own  State  ;  secondly,  the  old  bank  had  abused 
its  powers  in  the  interest  of  a  political  party ;  and,  thirdly,  he 
had  previously  doubted  the  constitutional  authority  of  Congress 
to  establish  the  bank.  The  situation  in  his  opinion  was  changed 
in  1 816,  since  it  was  now  clear  that  such  an  institution  was 
indispensable  to  treasury  operations. 

Finally,  on  March  14,  181 6,  the  new  bill,  framed  more  in 
accordance  with  the  ideas  of  the  administration,  was  passed 
by  the  House  by  a  vote  of  80  to  71  ;  of  the  minority  38  were 
Federalists  and  31  were  Republicans.  The  bill  passed  the 
Senate  and  was  approved  by  the  president  April  10. 

68.    Career  of  the  Bank,  1816-1819. 

From  the  standpoint  of  note  circulation  the  following  pro- 
visions are  of  importance :  circulation  was  limited  to  the 
total  capital  of  the  bank,  $35,000,000 ;  notes  were  payable 
in  specie  on  demand,  under  a  penalty  of  12  per  cent,  per 
annum  in  case  of  failure  ;  notes  of  denominations  of  less  than 
five  dollars  were  prohibited ;  and  the  notes  were  receivable  in 
all  payments  to  the  United  States.  The  relations  of  the  bank 
to  the  government  were  twofold  :  the  government  subscribed 
$7,000,000  of  the  capital ;  and  three-quarters  of  the  remaining 
$28,000,000,  or  $21,000,000,  was  to  be  subscribed  in  the 
funded  debt  of  the  United  States.  Five  of  the  twenty-five 
directors  were  appointed  by  the  president.  The  bank  was 
obliged  to  transfer  the  public  funds  of  the  government  from 
place  to  place  without  commission ;  the  deposit  of  the  funds 
of  the  government  was  to  be  made  with  the  bank,  unless  the 
secretary  should  otherwise  direct,  in  which  case  the  secretary 
of  the  treasury  should  lay  before  Congress  the  reasons  for  such 
action.  In  return  for  the  privileges  granted  in  the  charter, 
the  bank  was  obliged  to  pay  $1,500,000  in  three  equal  instal- 
ments to  the  United  States,  and  finally  the  United  States 
agreed    to    establish    no   other   bank    under    federal   charter 


§68]     Career  of  the  Bank,  1816-1819.       151 

except  in  the  District  of  Columbia.  Congress  was  given  the 
power  to  inspect  the  books  of  the  bank,  and  if  there  were  rea- 
son to  believe  that  the  charter  was  violated  to  direct  the 
president  to  issue  a  writ  of  sciro  facias  whereby  the  bank 
should  show  cause  why  the  charter  should  not  be  forfeited. 

The  enactment  of  the  bank  measure  was  quickly  reinforced 
by  the  passage  of  a  joint  resolution  providing  that  after  Feb- 
ruary 20,  181 7,  all  dues  to  the  government  should  be  paid  in 
legal  currency,  treasury  notes,  notes  of  the  bank  of  the  United 
States,  "  and  in  notes  of  banks  which  are  payable  and  paid 
on  demand  in  the  said  currency  of  the  United  States."  State 
banks  were  thus  given  about  ten  months  to  get  their  houses  in 
order  if  they  wished  to  secure  a  financial  standing  with  the 
general  government.  This  was  a  vigorous  demand;  the 
United  States  Bank  had  yet  to  be  organized  and  many  local 
institutions  established  in  the  Middle  States  were  reluctant  to 
reduce  their  loans  and  contract  their  circulation  so  as  to  rest 
on  a  specie  basis.  In  midsummer,  1816,  the  banks  of  the 
Middle  States  held  a  convention  and  asked  that  the  date 
of  resumption  be  deferred,  giving  as  a  reason  that  the  United 
States  Bank  could  not  be  organized  in  the  time  assigned,  and 
that  they  wished  the  aid  of  this  institution  in  their  efforts  to 
resume.  Dallas  labored  the  harder  to  open  the  new  bank  on 
time ;  the  stock  was  taken,  directors  elected,  and  an  agent 
sent  abroad  to  purchase  bullion.  In  January,  181 7,  the  bank 
was  opened,  and  on  February  20,  the  date  originally  set,  the 
victory  rested  with  the  administration. 

During  the  first  year  of  its  operations  the  bank  was  badly 
managed ;  for,  instead  of  tactfully  and  vigorously  taking  the 
lead  in  restoring  banking  credit  to  a  sound  condition,  the 
officers  violated  provisions  in  its  charter  and  undertook 
through  the  numerous  branches  to  oppress  local  banks. 
Although  the  charter  provided  for  a  subscription  of  $7,000,000 
in  specie,  only  $2,000,000  was  paid  in,  and  instead  ©f  the  full 
complement  of  government  stock  $12,000,000  was  subscribed 
in  the  personal  notes   of  stockholders.     Discounts  were  in- 


152  Reorganization  after  War.  [§68 

judiciously  if  not  illegally  made  on  United  States  bank  stock 
as  collateral ;  stock  jobbing  was  common ;  and,  through  in- 
side arrangements  made  with  bank  officers,  speculators  bor- 
rowed money  of  the  bank  and  bought  shares  simultaneously. 
Even  the  president  and  other  officials  of  the  bank  speculated 
in  its  stock  ;  and  dividends  were  paid  to  stockholders  who 
had  not  completed  their  subscriptions.  Nor  was  the  bank 
successful  in  restoring  note  circulation  to  a  healthy  state ; 
although  resumption  was  nominally  made,  specie  continued  at 
a  slight  premium.  For  this  the  bank  possibly  was  only  in  part 
to  blame ;  there  was  too  little  specie  in  the  country  and  for- 
eign trade  was  adverse.  Instead  of  recognizing  this  difficulty 
the  bank  by  sharp  practice  extended  its  own  circulation  be- 
yond proper  limits  and  also  stirred  up  bitter  feeling  by  en- 
deavoring to  control  the  circulation  of  note  issues  of  local 
banks.  Branches  in  the  South  and  West  loaned  with  great 
freedom,  and  as  the  notes  issued  on  such  loans  were  redeem- 
able at  any  branch  East  or  West  the  capital  of  the  bank  was 
unduly  diverted  to  sections  which  did  not  enjoy  commercial 
stability.  It  was  not  long  before  the  bank  saw  the  danger, 
and  in  August,  1818,  it  sent  out  orders  to  redeem  no  notes 
except  at  the  office  where  issued ;  and  in  the  hope  of  return- 
ing to  safer  ground  it  reduced  its  credits.  This  reversal 
of  policy  occurred  at  a  time  when  commerce  was  strug- 
gling to  recover  itself  from  the  inflation  of  the  war  period, 
and  so  sudden  was  it  that  instead  of  warding  off  it  hastened 
the  impending  disaster ;  thus  far  the  bank  was  not  a  success 
as  an  agency  for  improving  the  currency.  Two  years  of  reck- 
less management  culminated  in  the  smash  of  the  Baltimore 
branch  with  a  loss  of  $3,000,000,  and  in  January,  18 19,  a 
motion  was  introduced  into  Congress  looking  to  a  setting  aside 
of  the  charter ;  nothing  saved  the  bank  from  ruin  but  placing 
at  the  head  of  its  affairs  Langdon  Cheves,  a  sound  business 
man. 

A  conservative  policy  followed,  which  continued  during  the 
presidency  of  Cheves  ( 1819-1823)  and  the  earlier  years  of  his 


69] 


Local  Banks,  1815— 1830. 


J53 


successor,  Biddle.     The  contraction  which  followed  is  made 
clear  in  the  following  figures  of  circulation  and  loans  :  — 


Year 

Circulation 

Loans 

.8,7 
1818 
1819 
1820 
1821 
1822 
1823 

$1,911,000 
8,339,000 
6,563,000 
3,589,000 
4,567,000 
5,578,000 
4,361,000 

$3,485,000 
41,181,000 
35,786,000 
31,401,000 
30,905,000 
28,061,000 
30,736,000 

During  its  entire  history  the  bank  issued  but  little  circula- 
tion in  New  England,  and  not  until  its  later  days  any  large 
amount  in  the  Middle  States.  On  account  of  this  sectional- 
ism in  its  operations  the  bank  did  not  come  into  conflict  with 
the  strong  local  institutions  of  the  East.  In  the  South  and 
West  it  exercised  a  strong  financial  guidance,  which  was  greatly 
needed,  but  in  doing  this  it  occasioned  jealousies  and  ill-will 
which  counted  to  its  disadvantage  in  the  long  run.  The  dis- 
tribution of  the  bank's  circulation  in  1818,  1823,  and  1832  is 
interesting  to  note  :  — 


Section 

Sept.  30,  1819 

Jan.  2,  1823 

April  4,  1832 

West 

$518,000 
969,000 

3,960,000 
670,000 
817,000 

$393,000 
868,000 

2,281,000 
744,000 
45,000 

$901,000 
5,478,000 
5,311,000 
5,637,000 
5,131,000 

Total 

$6,934,000 

$4,331,000 

$22,458,000 

69.    Local  Banks,  1815-1830. 

It  is  difficult  to  form  a  clear  impression  of  the  progress  of 
local  banking  previous  to  1834  because  of  lack  of  complete 
official  reports.  The  virtue  of  publicity  in  accounts  of  bank- 
ing institutions  was  not  generally  recognized  or  insisted  upon 
by  law.  Gallatin,  whose  essay  on  Banking  and  Currency 
written  in  1831  is  by  far  the  most  thorough  discussion  of  the 


1 54  Reorganization  after  War.  [§  69 

subject,  refers  "  to  the  mystery  with  which  it  has  been  thought 
necessary  "  in  several  of  the  States  "  to  conceal  the  operations 
of  the  banking  institutions."  This  led  not  only  to  erroneous 
opinions  on  the  part  of  the  public,  but  gave  free  opportunity 
for  mismanagement  by  bank  officials.  As  far  as  records  go 
the  condition  of  banks  in  1815,  1820,  and  1829  was  as 
follows  in  millions  of  dollars  :  — 


Vear 


Number    .... 
Capital 

Notes  in  circulation 

Deposita  .... 

Specie 

Loans 


1815 


State 
banks 


208 
82. 

45-5 
to  100. 

17- 
150. 


1820 


State 
banks 


3°7 
102. 1 

40.6 

31.2 

16.6 


U.  S. 
Bank 


35° 

4.2 

4-7 

3-i 

3i-4 


Total 


I37-I 
44.8 


35-9 
19.8 


Nov.  1,  i82g 


State 
banks 


48.2 

40.7 
14.9 
1370 


U.  S. 
Bank 


35-° 
13.0 

14.7 

7-> 

40.6 


Total 


145- 1 
61.3 
55-5 

22.1 
177.6 


The  character  of  the  local  institutions  varied  greatly,  depend- 
ing upon  the  available  amount  of  surplus  capital  in  different 
sections  and  the  degree  of  past  commercial  experience  of  the 
communities  in  which  they  were  established.  Each  State  was 
working  out  for  itself  a  system  which  presented  with  some 
degree  of  accuracy  the  current  stage  of  economic  thought  and 
industrial  development.  No  account  of  this  can  be  given 
here,  but  in  order  to  understand  the  contest  which  Jackson 
later  waged  against  the  United  States  Bank  and  the  financial 
entanglements  of  1837  a  few  aspects  of  local  banking  must 
be  noticed.  The  two  principal  defects  in  local  banking  were 
the  opportunities  for  over-issue  of  notes  and  the  making  of 
loans  on  improper  security.  Of  note  issues,  substantially 
three  systems  were  tried  in  different  parts  of  the  country : 
(1)  issues  based  only  upon  the  general  assets  of  a  particular 
bank;  (2)  issues  protected  by  a  general  safety  fund;  and 
(3)  issues  based  upon  the  credit  and  faith  of  the  States.  In 
New    England   circulation  was  generally  based  upon  assets; 


§69]  Local  Banks,  1815-1830.  155 

as  early  as  1809  Massachusetts  laid  a  penalty  of  2  per  cent, 
a  month  on  banks  which  failed  to  redeem  their  notes  on 
demand,  and  in  1829  passed  an  act  providing  that  all  banks 
thereafter  incorporated  should  be  restricted  in  their  note 
circulation  to  one  and  a  fourth  times  the  capital.  In  New 
England  there  was  also  developed  what  was  known  as  the 
Suffolk  system  of  redemption,  under  which  the  notes  of  New 
England  banks  uniformly  circulated  at  par  and  were  generally 
held  in  good  repute.  By  this  plan  all  the  large  city  banks  had 
to  stand  ready  at  all  times  to  redeem,  and  the  country  banks 
in  New  England  were  compelled  to  establish  redemption 
agencies  in  Boston  ;  the  Suffolk  Bank  in  Boston  was  charged 
with  the  duty  of  bringing  any  delinquent  to  terms  by  collect- 
ing its  notes  as  fast  as  they  made  their  appearance  in  Boston 
and  returning  them  to  the  place  of  issue  for  payment  in 
specie. 

In  New  York  the  system  of  banking  on  general  assets  was 
supplemented  by  the  safety-fund  system  introduced  in  1829, 
under  which  each  bank  was  required  to  pay  annually  to  the 
treasurer  of  the  State  a  sum  equal  to  one-half  of  one  per  cent, 
of  its  capital  stock  until  the  payments  should  amount  to  3 
per  cent.,  the  fund  to  be  used  for  the  redemption  of  the  notes 
of  any  failed  bank.  These  precautions  were  the  exception ; 
Southern  and  Western  States  were  not  so  careful  to  prevent 
over-issues,  and  many  country  banks  established  in  remote 
places  succumbed  to  the  temptation.  All  banks  indeed 
throughout  the  country  issued  notes  of  $5,  and  many  those  of 
a  lower  denomination.  Failures  of  banks  were  common  and 
bill  holders  and  depositors  suffered  much.  As  the  United 
States  Bank  with  its  branches  covered  a  wide  range  of  terri- 
tory, it  naturally  had  frequent  occasion  to  discriminate  against 
suspicious  issues,  and  thus  not  only  brought  down  the  vio- 
lent opposition  of  reckless  financial  adventurers  but  gave  cause 
for  complaint  by  banks  which  were  honestly  endeavoring  to 
satisfy  the  great  demand  for  loans  in  regions  poorly  provided 
with  capital. 


156  Reorganization  after  War.  [§70 

70.    United  States  Bank,  1823-1829. 

The  history  of  the  United  States  Bank  from  1823  to  1829 
was  on  the  whole  uneventful.  Cheves  was  succeeded  as 
President  in  January,  1823,  by  Nicholas  Biddle  of  Philadelphia, 
who  was  elected  to  represent  "  a  young  and  progressive  policy  " 
as  against  an  "  old  and  conservative  policy."  His  aim  was  to 
increase  the  circulation  and  yet  avoid  the  dangers  which  nearly 
wrecked  the  bank  between  181 7  and  18 19.  This  he  accom- 
plished through  the  freer  use  of  domestic  bills  of  exchange 
and  the  introduction  of  branch  drafts.  Under  the  charter 
provision  only  the  president  and  the  cashier  of  the  parent 
bank  could  affix  signatures  to  bills  of  branches.  This  restric- 
tion practically  barred  branch  issues,  as  the  officers  could  not 
sign  more  than  1500  notes  a  day,  and  it  was  calculated  that 
on  this  basis  four  years  would  be  required  to  furnish  the 
volume  needed.  The  bank,  therefore,  repeatedly  endeav- 
ored to  secure  congressional  authority  to  permit  the  offi- 
cers of  the  branch  banks  to  sign  notes,  but  the  efforts  failed 
on  the  ground  that  a  variety  of  signatures  meant  a  variety  of 
notes,  causing  an  increase  in  the  evils  of  irresponsible  and 
inflated  circulation  which  the  establishment  of  the  bank  was 
in  part  intended  to  remedy.  The  branch  draft  devised  by 
Biddle  was  obviously  a  method  for  doing  the  same  thing  by 
the  issue  of  drafts  for  even  sums  of  $5,  #10,  or  $20,  drawn 
by  a  branch  upon  the  parent  bank,  payable  to  an  officer  of  the 
bank  and  upon  endorsement  payable  to  bearer,  thus  acquiring 
some  of  the  characteristics  of  circulation  bank-notes.  The 
inflation  in  circulation  which  resulted  from  Biddle's  expansive 
policy  is  seen  in  the  following  table  of  yearly  average  circulation 
of  the  United  States  Bank  :  — 


Year 

Circulation 

Year 

Circulation 

1823 
1824 
1825 
1826 
1827 
t828 

$4,487,000 
5,791,000 
8,825,000 
9,635,000 
9,780,000 

11,067,000 

1829 
1830 
183 1 
1832 
•*33 
1834 

$13,102,000 
15,067,000 
19,035,000 
19,989,000 
18,636,000 
16,790,000 

§71]        Constitutionality  of  the  Bank.  157 

As  to  the  bank's  relations  to  the  treasury  department, 
there  was  little  criticism  after  18 19  until  Jackson's  term  as 
president.  In  the  annual  report  for  1828  Secretary  Rush 
made  special  reference  to  the  great  service  of  the  bank ;  the 
$97,000,000  received  in  the  treasury  during  the  four  years  of 
Adams'  administration  had  been  applied  to  the  various  objects 
of  expenditure  without  embarrassment  or  delay,  and  the  credit 
for  this  result  was  largely  ascribed  to  the  bank.  "  In  faithful 
obedience  to  the  provisions  of  its  charter,  and  aided  by  its 
branches,  the  bank  had  afforded  the  necessary  facilities  for 
transferring  the  public  moneys  from  place  to  place." 

71.     Constitutionality  of  the  Bank. 

Such  scruples  as  statesmen  may  have  had  over  the  constitu- 
tionality of  a  bank  chartered  by  the  federal  government  were 
soon  rendered  purposeless  by  a  decision  of  the  Supreme 
Court.  In  181 8  the  legislature  of  Maryland  imposed  a  stamp 
duty  on  the  circulating  notes  of  all  banks  or  branches  thereof 
located  in  the  State  and  not  chartered  by  the  legislature. 
The  Maryland  branch  of  the  United  States  Bank  refused  to 
pay  this  tax,  and  the  State  court  sustained  a  suit  against  the 
cashier,  McCulloch ;  therefore  the  case  was  carried  to  the 
United  States  Supreme  Court,  and  decided  in  1819  in 
the  famous  case  of  McCulloch  v.  Maryland.  The  opinion 
written  by  Chief-Justice  Marshall  is  in  harmony  with  the  long 
line  of  decisions  through  which  he  elaborated  the  fundamental 
powers  of  the  federal  government.  Against  the  constitution- 
ality of  the  bank  it  had  in  general  been  argued  that  the  power 
of  Congress  to  incorporate  a  bank  is  not  among  those  enumer- 
ated in  the  Constitution;  that  the  inclusion  of  such  a 
power  had  been  expressly  rejected  by  the  convention  which 
framed  the  Constitution,  and  that  the  enumerated  powers 
could  be  carried  into  exercise  without  a  bank.  To  the  argu- 
ment that  a  bank  might  facilitate  the  collection  of  taxes,  and 
be  justified  under  the  general  powers  of  Congress  on  the 
ground  of  fiscal   convenience,  the   reply  was   made  that  the 


158  Reorganization  after  War.  [§71 

Constitution  allows  only  the  means  which  are  necessary,  and 
not  merely  those  which  are  convenient  for  effecting  the  enu- 
merated powers.  Even  the  merit  of  convenience  was  not 
granted  by  opposing  critics,  who  declared  that  the  local  or 
State  banks  in  existence  were  entirely  competent  to  meet  all 
the  needs  of  the  government  in  the  collection  of  revenue.1 

Marshall  in  his  decision  declared  that  the  United  States 
Bank  was  an  instrument  which  was  necessary  and  proper  for 
carrying  on  the  fiscal  operations  of  the  government.  The 
sword  and  the  purse,  all  the  external  relations,  and  no  incon- 
siderable portion  of  the  industry  of  the  nation,  are  intrusted 
to  the  government ;  having  such  ample  powers,  on  the  due 
execution  of  which  the  happiness  and  prosperity  of  the 
nation  so  vitally  depend,  it  must  also  be  intrusted  with 
ample  means  for  their  execution.  "Throughout  this  vast 
republic,  from  the  St.  Croix  to  the  Gulf  of  Mexico,  from  the 
Atlantic  to  the  Pacific,  revenue  is  to  be  collected  and  ex- 
pended, armies  are  to  be  marched  and  supported.  The 
exigencies  of  the  nation  may  require  that  the  treasure  raised 
in  the  North  should  be  transported  to  the  South,  that  raised 
in  the  East  conveyed  to  the  West,  or  that  this  order 
should  be  reversed.  Is  that  construction  of  the  Constitution 
to  be  preferred  which  would  render  these  operations  difficult, 
hazardous,  and  expensive?"  The  Constitution,  said  Marshall, 
did  not  intend  to  create  a  dependence  of  the  government  of 
the  Union  on  those  of  the  States  for  the  execution  of  the 
great  powers  assigned  to  it.  The  choice  of  means  implies 
the  right  to  choose  a  national  bank  in  preference  to  State 
banks,  and  Congress  alone  can  make  the  election.  The 
branches  of  the  bank  proceeding  from  the  same  stock  are 
equally  constitutional  with  the  parent  bank. 

The  court  was  equally  explicit  and  emphatic  in  expressing 
its  conviction  that  a  State  could  not  tax  the  bank  or  one  of  its 
branches.  "  If  the  State  may  tax  one  instrument  employed 
by  the  government  in  the  execution  of  its  powers,  they  may 

1  Story,  Commentaries,  Bk.  III.,  ch.  25. 


§  7»]         Constitutionality  of  the  Bank.        159 

tax  any  and  every  other  instrument.  They  may  tax  the  mail ; 
they  may  tax  the  mint;  they  may  tax  patent  rights;  they 
may  tax  the  papers  of  the  custom-house ;  they  may  tax 
judicial  process;  they  may  tax  all  the  means  employed  by 
the  government  to  an  excess  which  would  defeat  all  the 
ends  of  government."  For  this  reason  the  law  passed 
by  the  legislature  of  Maryland  imposing  a  tax  on  the  Bank 
of  the  United  States  was  declared  unconstitutional.  This 
opinion  did  not  preclude  State  taxation  of  real  property  of 
the  bank  within  the  State,  nor  the  taxation  of  securities,  held 
by  citizens  of  Maryland,  in  common  with  other  property  of 
the  same  description  throughout  the  State.1  Interpreters  of 
the  Constitution  belonging  to  the  school  of  strict  con- 
struction also  note  that  in  this  case  the  court  confined 
the  authority  of  Congress  to  the  establishment  of  a  bank  as 
a  means  of  exercising  the  fiscal  functions  of  the  government, 
and  that  consequently  the  establishment  of  national  banks, 
as  in  our  present  system,  for  the  purpose  of  providing  a 
currency,  is  an  altogether  different  question  and  must  be 
justified  on  other  grounds.2 

An  effort  to  tax  the  United  States  Bank  was  also  made  in 
Ohio  ;  the  State  imposed  a  tax  of  £5 0,000  on  each  of  the  two 
branches  established  at  Cincinnati  and  Chillicothe,  to  go  into 
effect  September  15,  1819.  The  branches  continued  busi- 
ness, refused  payment,  and  the  local  sheriff  in  behalf  of  the 
State  seized  $98,000  in  money ;  the  bank  through  the  United 
States  Circuit  Court  secured  the  arrest  of  the  State  officials 
involved,  and  on  appeal  the  dispute  was  carried  to  the 
Supreme  Court  in  the  case  known  as  O shorn  et  al  v.  United 
States  Bank  (1824).  In  the  opinion  then  delivered  Chief- 
Justice  Marshall  was  still  more  explicit  in  resting  the  validity  of 
his  decision  in  the  case  of  McCulloch  v.  The  State  of  Maryland, 
on  the  principle  that  the  bank  was  a  public  corporation  created 
for  public  and  national  purposes.     If  the  bank  were  founded 

1  Wheaton's  Reports,  pp.  316-437;  Marshall's  Writings,  pp.  160-187. 

2  Tucker,  Constitution  of  the  U.  S.,  I  :  516-518. 


160  Reorganization  after  War.  [§72 

upon  contract  between  individuals,  having  private  trade  and 
private  profit  for  its  great  and  principal  object,  it  certainly 
would  be  subject  to  the  taxing  power  of  the  State,  as  any 
individual  would  be  ;  and  the  casual  circumstance  of  its  being 
employed  by  the  government  in  the  transaction  of  its  fiscal 
affairs  would  not  exempt  its  private  business  from  the  operation 
of  the  taxing  power.  It  was  denied,  however,  that  the  bank 
was  founded  for  any  such  limited  private  purpose,  and  the 
court  enlarged  upon  the  services  rendered  to  the  government. 

72.    Issues  of  Banks  Owned  by  States. 

Another  interesting  constitutional  question  arose  during  the 
period  under  review ;  viz.,  the  constitutionality  of  bills  issued 
by  banks  established  in  the  name  of  a  State.  Institutions 
owned  and  managed  by  States  were  organized  in  the  South 
and  Southwest :  were  not  the  notes  then  issued,  depending 
upon  the  faith  of  State  governments,  practically  bills  of  credit 
expressly  forbidden  to  States  by  the  Constitution  ?  This  ques- 
tion came  before  the  Supreme  Court  in  1824  in  the  case  of 
Bank  of  the  United  States  v.  The  Planters'  Bank  of  Georgia, 
and  in  1829  in  Bank  of  the  Commonwealth  of  Kentucky  v. 
Wister  et  al.  In  these  cases  the  local  banks  of  Georgia 
and  Kentucky,  in  which  the  State  governments  had  invested, 
endeavored  to  shield  themselves  behind  the  Eleventh  Amend- 
ment, and  entered  a  plea  of  non-suability  of  a  sovereign  State. 
The  force  of  this  plea  was  admitted  by  the  Supreme  Court, 
provided  the  State  as  a  sovereign  was  the  sole  owner  of  the 
bank-notes  issued,  but  if  this  ground  were  taken  the  court 
in  the  latter  case  held  that  the  notes  issued  by  the  bank  would 
be  bills  of  credit,  and  contrary  to  the  provisions  of  the  Con- 
stitution of  the  United  States.  The  next  year  (1830),  in  the 
case  of  Craig  v.  The  State  of  Missouri  (4  Peters,  140),  the 
Supreme  Court  in  an  opinion  delivered  by  Marshall  declared 
that  certificates  issued  by  State  loan  officers  and  receivable  for 
taxes  and  salaries  were  unconstitutional.  Decisions  of  this 
character  helped  to  excite  popular  resentment  in  the  South 


§73]  Tariff  of  1 8 1 6.  1 6 1 

toward  the  United  States  Bank,  which  though  a  private  insti- 
tution came  to  be  regarded  as  a  federal  bank,  to  which  was 
granted  the  privilege  of  note  issue  denied  to  a  local  bank  even 
though  clothed  with  the  power  of  State  sovereignty. 

73.     Tariff  of  1816. 

In  1816  the  customs  revenue  of  the  government  was  enor- 
mous, not  only  passing  far  beyond  any  previous  returns,  but 
standing  at  a  figure  not  again  reached  until  1850.  The 
imports,  valued  in  18 14  at  less  than  $13,000,000,  rose  to 
$147,000,000  in  1816.  "The  English  manufacturers,  to  whose 
merchandise  after  years  of  commercial  war  an  ample  market 
finally  opened,  rushed  as  if  to  the  attack  of  a  fortress."  *  An 
increase  in  customs  duties  resulted  beyond  all  anticipation  ; 
instead  of  $13,000,000  for  18 16,  as  previously  estimated  by 
Dallas,  §36,000,000  were  turned  into  the  treasury. 

Signs  were  early  apparent  of  an  importation  overwhelming 
and  for  manufactures  possibly  ruinous.  In  1815,  upon  sub- 
mitting the  treaty  of  peace,  Madison  called  attention  to  the 
unparalleled  development  of  manufactures,  and  "  anxiously 
recommended  this  source  of  national  independence  and  wealth 
to  the  prompt  and  constant  guardianship  of  Congress."  A 
step  further  was  taken  when  in  his  annual  message  in  Decem- 
ber, 1 81 5,  he  affirmed  the  necessity  of  protection  to  enter- 
prising citizens  "  whose  interests  are  now  at  stake."  Dallas 
was  also  promptly  called  upon  to  prepare  a  bill,  which  he 
subsequently  submitted  in  an  elaborate  report,  February  12, 
181 6,  stating  the  principles  upon  which  the  measure  was 
framed.  Not  only  was  revenue  to  be  secured  and  its  collec- 
tion rendered  equal  and  certain,  but  the  interests  of  agricult- 
ure, manufactures,  trade,  and  navigation  must  be  conciliated. 
Articles  of  foreign  importation  were  arranged  by  Dallas  in 
three  classes  according  to  the  degree  of  dependence  upon 
foreign  countries  :  in  the  first  class  were  commodities  which 
could  be  manufactured  in  sufficient  supply  at  home,  on  which 
1  Rabbeno,  American  Commercial  Policy,  p.  153. 
11 


162  Reorganization  after  War.  [§73 

it  was  proposed  to  place  duties  high  enough  to  shut  out  foreign 
competition ;  in  the  second,  articles  partially  supplied  at  home, 
which  were  to  be  treated  to  less  protection  ;  and,  in  the  third, 
articles  not  produced  at  home,  and  consequently  subject  purely 
to  fiscal  considerations. 

A  general  tariff  bill  was  introduced  March  12,  1816,  and 
enacted  April  2  7  ;  in  effect  it  fell  slightly  short  of  the  rates 
recommended  by  Dallas.  Both  the  debate  upon  this  measure 
and  the  provisions  of  the  act  are  of  especial  importance  in 
fiscal  history.  The  new  textile  industries  were  threatened  by 
English  competition  ;  hence  a  duty  on  woollen  and  cotton  of  25 
per  cent,  until  June  30,  1 8 1 9,  and  after  that  date  of  20  per  cent. ; 
with  respect  to  cottons  it  was  further  provided  that  all  cotton 
cloths,  the  original  cost  of  which  was  less  than  25  cts.  per  square 
yard,  should  be  deemed  to  have  cost  that  sum,  and  pay  duties 
accordingly.  This  was  the  introduction  of  the  minimum  prin- 
ciple, and  its  immediate  object  was  the  exclusion  of  coarse, 
low-priced  cotton  fabrics  from  the  East  Indies.  The  act  also 
imposed  a  30  percent,  ad  valorem  rate  on  certain  other  goods, 
as  hats,  cabinet  wares,  manufactured  wood,  carriages,  leather 
and  its  manufactures,  and  paper.  A  specific  duty  of  3  cts.  a 
pound  was  laid  upon  sugar. 

So  great  were  the  changes  in  rates  that  it  is  often  asserted 
that  the  tariff  of  181 6  is  the  beginning  in  the  United  States  of 
the  distinct  application  of  the  protective  principle  to  domestic 
industry  by  means  of  customs  duties.  Even  if  this  be  not 
strictly  true,  the  change  in  policy  was  so  marked  that  this 
tariff  is  properly  regarded  as  a  turning-point  in  economic 
legislation.  Duties  in  the  early  tariffs  may  have  incidentally 
afforded  protection;  but  in  1816  protection  was  adopted  as  a 
fundamental  basis  of  the  fiscal  system  and  revenue  was  subor- 
dinated to  industrial  needs.  A  comparison  of  tariff  rates  on 
the  most  important  commodities  as  adopted  in  the  first  tariff 
of  1789,  the  rates  prevailing  just  before  the  War  of  181 2,  the 
war  rates,  and  those  enacted  in  18 16,  shows  the  progress  toward 
restriction :  — 


§73] 


Tariff  of  1816. 


163 


Cotton  manufactures 
Glass  manufactures 
Rolled  or  hammered  iron 
Leather    .... 
Molasses  .... 
Sugar,  brown    .     . 
Boots,  men's  leather 
Cabinet  ware     .     . 
Candles,  tallow 
Carriages .... 
Earthenware      .     . 
Fish,  dried   .     .     . 

Hats 

Hemp,  manufactured 

Linen  

Nails  •  •  .  .  • 
Paper,  writing  . 
Salt     .... 


1789 


free 

10  per  cent. 
ji  per  cent. 
7J  per  cent. 
i\  cts.  gal. 

1  ct.  lb. 

50  cts.  pair 
7J  per  cent. 

2  cts.  lb. 

15  per  cent. 
10  per  cent. 
50  cts.  quintal 
7i  per  cent. 
.60  cwt. 
S  per  cent. 
1  ct.  lb. 
7$  per  cent. 
10  cts.  bushel 


Acts  of  1804,      Acts  of  1812 
1807,  1808  to  1816 


1 7 1  per  cent. 
22  j  per  cent. 
17  j  per  cent. 
174  per  cent. 
5  cts.  gal. 
2J  cts.  lb. 
75  cts.  pair 
15  per  cent. 
2  cts.  lb. 
22^  per  cent. 
17J  per  cent. 
50  cts-  quintal 
i'/b  per  cent. 
$1.00  cwt. 
15  per  cent. 
2  cts.  lb. 
15  per  cent, 
free 


35  percent. 
45  per  cent. 
35  per  cent. 
35  per  cent. 
10  cts.  gal. 
5  cts.  lb. 
$1.50  pair 
30  per  cent . 
4  cts.  lb. 
45  per  cent. 
35  per  cent. 
$1.00  quintal 
35  per  cent. 
$2.00  cwt. 
30  per  cent. 
4  cts.  lb. 
30  per  cent. 
20  cts.  bushel 


Act  of  April 
27,  1816 


25  per  cent. 
20  per  cent. 
30  per  cent. 
30  per  cent. 
5  cts.  gal. 
3  cts.  lb. 
$1.50  pair 
30  per  cent. 
3  cts.  lb. 
30  per  cent. 
20  per  cent. 
f  1. 00  quintal 
30  per  cent. 
$1.50  cwt. 
35  per  cent. 
3  cts.  lb. 
30  per  cent. 
20  cts.  bushel 


The  debate  over  the  tariff  bill  of  18 16  was  the  beginning  of 
the  discussion  as  to  the  relative  advantages  of  a  definite  policy 
of  free  trade  or  protection,  a  discussion  which  has  lasted  to  the 
present  time.  On  the  whole  opposition  to  increased  restriction 
was  weak  in  1816  because  there  was  an  unquestioned  emer- 
gency ;  the  distress  of  the  textile  industry  was  obvious  and 
silenced  objections  which  would  otherwise  have  been  more 
insistent.  The  tariff  question,  possibly  for  the  last  time,  was 
treated  in  a  broad  and  rational  spirit ;  support  for  the  bill 
came  from  all  parts  of  the  country.  The  vote  in  the  House 
of  Representatives  by  sections  was  as  follows  :  — 


In  favor 

Opposed 

New  England       .     . 
Middle  States .     .     . 
West  (Ohio)     .     .    . 
South  and  Southwest 

17 
44 

4 
23 

10 
10 

34 

Total 

88 

54 

Even  in  South  Carolina  the  vote  in  favor  of  the  bill  was  4  to  3. 
The  time  had  not  yet  arrived  for  the  enumeration  of  the  extreme 
doctrines  which  were  subsequently  formulated  by  protectionists 
on  the  one  hand  and  by  free-traders  on  the  other.      The  policy 


1 64  Reorganization  after  War.  [§73 

of  "  let  alone  "  was  recommended  by  a  few,  but  the  champions 
of  the  merchants  and  of  commerce  dwelt  chiefly  upon  the 
unjust  discriminations  of  tariffs,  the  evil  social  effects  of  manu- 
facturing, and  contrasted  the  delights  of  bucolic  life ;  such 
radical  opposition  as  Randolph's  represented  the  individualism 
of  a  free  lance  rather  than  the  convictions  of  any  well-defined 
class.  There  was,  however,  plenty  of  discussion  over  the  scale 
of  rates,  as  indicating  the  measure  of  protection  which  Con- 
gress was  willing  to  grant.  New  England,  whose  interests  were 
still  commercial,  criticised  rather  than  antagonized,  and  even 
Calhoun,  who  had  not  yet  consecrated  himself  to  the  sectional 
profit  of  the  agricultural  South,  championed  the  interests  of 
manufactures  as  a  part  of  the  security  of  the  country.  "  Nei- 
ther agriculture,  manufactures,  nor  commerce,  taken  separately, 
is  the  cause  of  wealth ;  it  flows  from  the  three  combined  and 
cannot  exist  without  each." 

The  importance  of  the  tariff  question  as  it  developed 
during  the  next  fifteen  years,  from  1818  until  the  passage  of 
the  compromise  tariff  in  1833,  justifies  its  consideration  in  a 
separate  chapter ;  but  since  the  revenues  were  fairly  con- 
stant after  182 1,  in  spite  of  frequent  changes  in  rates  of  duty, 
and  as  the  several  tariff  measures  were  founded  on  other  con- 
siderations than  those  of  meeting  the  needs  of  the  treasury,  it 
is  possible  to  continue  here  with  advantage  a  general  sketch 
of  the  state  of  the  treasury,  the  receipts,  expenditures,  and 
public  indebtedness  from  181 7  until  1834  when  the  debt  was 
extinguished. 

The  administration  of  the  treasury  department  during  the 
terms  of  Monroe  and  John  Quincy  Adams  was  in  competent 
hands.  William  H.  Crawford  succeeded  Dallas  as  secretary 
of  the  treasury  in  March,  181 6,  and  held  office  until  1825. 
He  is  a  good  illustration  of  the  political  statesman  managing 
the  affairs  of  finance ;  his  experience  in  public  life  had  been 
long  and  varied ;  he  had  been  senator  from  Georgia,  minister 
to  France,  and  secretary  of  war;  in  18 16  he  was  talked  of  for 
the  presidency,  but  stepped  aside  for  Monroe,  thus  gaining,  it 


§74]  Financial  Embarrassments.  1^)5 

was  supposed,  a  right  to  the  succession.  He  was  a  conserva- 
tive Democrat,  of  the  Virginian  type  as  opposed  to  the  more 
radical  Westerners ;  he  had  been  a  stanch  supporter  of  the 
First  United  States  Bank,  and  in  1816  labored  earnestly  for 
the  establishment  of  its  succession.  Though  not  a  great  man, 
he  gave  careful  attention  to  the  duties  of  his  office,  particu- 
larly during  the  first  part  of  his  administration  when  currency 
disorders  were  so  grave,  and  left  behind  him  an  interesting 
series  of  reports.  In  March,  1825,  Richard  Rush  of  Penn- 
sylvania succeeded  Crawford ;  he  had  been  long  engaged  in 
public  affairs,  and  in  Madison's  administration  had  received 
valuable  training  as  comptroller  of  the  treasury.  Rush  wrote 
much,  and,  being  an  ardent  protectionist,  embodied  in  his 
annual  reports  earnest  disquisitions  in  favor  of  restrictive  tariffs. 
He  was  also  an  early  advocate  of  the  warehousing  system. 
During  this  period  improvements  were  made  in  the  collection 
and  publication  of  commercial  statistics,  which  were  greatly 
needed  for  understanding  the  relation  of  tariff  duties  to  trade. 
The  first  commerce  and  navigation  report  appeared  in  1821. 

74.    Financial  Embarrassments,  1816-1821. 

The  first  few  years  of  this  period  were  exceptionally  per- 
plexing to  the  treasury  because  of  the  violent  fluctuations  in 
the  revenue.  On  January  1,  181 6,  the  total  indebtedness  of 
the  United  States  amounted  to  $127,334,000.  The  outstand- 
ing treasury  notes  were  speedily  funded  into  stock,  and  as  the 
abundant  revenues  of  1816  justified  the  policy  of  rapid  ex- 
tinction of  debt,  Congress  ordered  under  the  act  of  March  3, 
181 7,  that  from  the  proceeds  of  customs,  tonnage,  internal 
revenue  duties,  and  sales  of  public  lands,  $10,000,000  should 
be  annually  appropriated  to  the  sinking  fund.  As  revenues 
were  still  large  in  181 7,  $9,000,000  additional  were  appropri- 
ated to  the  sinking  fund  for  that  year ;  and  it  was  further 
provided  that  any  annual  surplus  income  beyond  $2,000,000 
should  be  devoted  to  the  purchase  of  government  securities. 
Too  much  faith,  however,  had  been  placed  in  the  future ;  the 


1 66  Reorganization  after  War.  [§  74 

years  1816  and  181 7  were  unusual  in  their  yield,  and  the 
wonderful  prosperity  did  not  continue.  Excessive  importations 
were  checked  as  trade  returned  to  its  usual  channels,  and  the 
normal  state  of  the  budget  began  to  be  apparent.  The  cus- 
toms receipts  grew  smaller ;  but  unfortunately  the  falling  off  did 
not  occur  until  after  the  internal  revenue  duties  had  been 
repealed.  Deficits  then  occurred  ;  and  the  years  i8i8to  1821 
proved  to  be  a  period  of  perplexity  and  discouragement  in 
the  administration  of  the  finances.  The  difficulties  were  also 
aggravated  by  the  bad  management  of  the  bank  to  which 
reference  has  been  made. 

The  year  1819  was  marked  by  a  crisis,  the  first  of  those  in- 
dustrial and  commercial  storms  which  have  since  recurred  at 
fairly  regular  intervals  in  our  history.  Its  causes  were  com- 
plex :  in  part  the  inability  of  the  manufacturing  industries  to 
recover  a  stable  footing  after  the  abnormal  growth  occasioned 
by  the  embargo  and  the  war,  and  in  part  a  spirit  of  specula- 
tion developed  by  the  several  years  of  rapid  commercial  ex- 
pansion and  bad  banking.  Distress  was  severe  throughout  the 
country ;  many  laborers  were  thrown  out  of  employment ; 
prices  of  exportable  articles  fell;  and,  in  general,  a  readjust- 
ment of  values  was  forced  upon  the  country.  Contraction  of 
credits  by  the  banks  in  their  endeavor  to  obtain  a  specie  basis 
in  181 7  also  contributed  to  diminish  the  credit  facilities  which 
the  banks  could  afford  to  importers  ;  the  State  banks  reduced 
their  note  issues  from  $100,000,000  in  1817  to  $45,000,000 
in  1 8 19.  The  condition  of  the  treasury  department  speed- 
ily became  grave,  and  in  the  annual  report  of  December,  181 9, 
Crawford  announced  a  deficit  and  demanded  either  a  reduc- 
tion in  expenditures  or  an  increase  in  revenue  :  in  any  event 
a  loan  was  necessary  to  tide  over  immediate  embarrassments, 
and  the  secretary  even  ventured  to  suggest  a  small  temporary 
issue  of  non-interest- bearing  treasury  notes.  In  April,  1820, 
the  House  committee  on  ways  and  means,  in  a  report  on  a 
loan  bill,  effectively  set  forth  the  needed  remedies ;  while  they 
hesitated  to  recommend  a  Joan,  they  believed  that  powerful 


§  74]  Financial  Embarrassments.  1 67 

reasons  existed  working  against  a  restoration  of  internal  revenue 
and  direct  taxation  in  a  period  of  profound  tranquillity.  Econ- 
omy and  retrenchment  in  government  expenditures  were  needed, 
especially  in  view  of  the  depression  of  commerce  and  naviga- 
tion, the  depreciation  in  the  value  of  exports  and  of  property 
of  every  description,  and  serious  embarrassments  in  all 
branches  of  industry,  which  compelled  economy  and  retrench- 
ment in  the  expenditures  of  every  citizen.  The  excess  of  ex- 
penditures over  revenue  was  ascribed  principally  to  the  heavy 
payments  in  the  redemption  of  the  public  debt ;  $32,000,000 
of  indebtedness  had  been  redeemed  since  January  1,  181 7. 
To  tide  over  the  difficulty,  a  loan  of  $3,000,000  was  author- 
ized by  the  act  of  May  15,  1820;  two-thirds  of  this  loan  was 
redeemable  at  the  pleasure  of  the  government,  and  bore  in- 
terest at  6  per  cent. ;  the  remainder  ran  for  twelve  years  and 
bore  5  per  cent,  interest. 

In  spite  of  a  reduction  in  ordinary  expenditures  the  situa- 
tion in  182 1  was  still  more  grave.  This  was  in  part  caused 
by  the  fact  that  several  millions  of  the  public  debt  were  due 
in  that  year.  Another  loan  of  $5,000,000  running  for  four- 
teen years  at  5  per  cent,  was  authorized  March  3,  and  as 
there  was  at  the  moment  a  large  amount  of  capital  in  the 
hands  of  owners  who  hesitated  to  invest  in  private  enterprises, 
it  was  readily  taken  at  a  premium  of  from  5.1  to  8  per  cent. 
Commerce  and  industry  then  began  to  revive,  and  there  was 
no  further  necessity  of  resorting  to  deficit  loans.  The 
experience  of  the  years  1818  to  1822  affords  another 
illustration  of  the  great  difficulty  of  adjusting  revenue  to  ex- 
penditures in  a  new  and  rapidly  expanding  nation,  especially 
a  nation  which  relied  for  its  revenue  chiefly  on  import  duties. 
Changes  in  political  or  commercial  relations  result  in  exces- 
sive fluctuations  of  revenue ;  thus  in  1808  the  imports, 
under  restricting  legislation  and  other  causes,  fell  off  by  over 
$80,000,000,  while  in  181 6,  in  the  transition  from  war  to 
peace,  imports  increased  by  $134,000,000  and  customs  duties 
by  nearly  $30,000,000  in  a  single  year.     So  too  from  18 18  to 


1 68  Reorganization  after  War. 


[§75 


1822  the  variations  due  to  commercial  causes  were  almost  as 
sudden  as  those  incident  to  war;  imports  diminished  from 
over  $121,000,000  in  1818  to  about  $87,000,000  in  18 19, 
and  in  1821  to  about  one-half  what  they  had  been  three  years 
before.  In  two  years  of  peace,  free  commerce,  and  the  full 
operation  of  the  United  States  Bank,  the  revenue  from  import 
duties  shrank  more  than  one  third. 

75.    Receipts  and  Expenditures,  1816-1833. 

Beginning  with  1822  the  treasury  settled  down  to  a  long 
term  of  prosperity.  With  the  exception  of  1824,  when  an 
unusual  payment  was  made  on  account  of  the  Spanish 
claims,  an  annual  surplus  was  turned  in  until  the  difficulties 
of  the  panic  of  1837  disturbed  commerce  and  finance.  The 
receipts  from  customs  were  fairly  constant  in  volume,  and 
this,  together  with  the  steady  growth  in  receipts  from  sales 
of  public  lands,  wiped  out  the  debt  in  1835. 

The  ordinary  receipts  of  the  government  18 16  to  1833 
were  as  follows  :  — 


Year 

Customs 

Public 
lands 

Miscel- 
laneous 

Total 

18.6 

$36|3°7»°°° 

$1,718,000 

$9,652,000 

$47,677,000 

18,7 

26,283,000 

1,991,000 

5,825,000 

33,099.000 

1818 

17,176,000 

2,606,000 

1,803,000 

21,585,000 

1819 

20,283,000 

3,274,000 

1,146,000 

24,603,000 

1820 

15,005,000 

1,635,000 

1,000,000 

17,840,000 

1821 

13,004,000 

1,212,000 

157,000 

14,573,000 

1822 

17,589,000 

1 ,803,000 

840,000 

20,232,000 

1823 

19,088,000 

916,000 

536,000 

20,540,000 

1824 

17,878,000 

984,000 

519,000 

ig, 381,000 

1825 

20,098,000 

1,216,000 

526,000 

21.840,000 

1826 

23,341,000 

1,393,000 

526,000 

25,260,000 

1827 

19,712,000 

1,495,000 

2,259,000 

22,966,000 

1828 

23,205,000 

j, 018,000 

540,000 

24,-63,000 

1829 

22,681,000 

1,517,000 

629,000 

24,827,000 

1830 

21,922,000 

2,329,000 

593,000 

24,844,000 

183 i 

24,224,000 

3,210,000 

1 ,092,000 

28,526,000 

1832 

28,465,000 

2,623,000 

779,000 

31,867,000 

1833 

29,032,000 

3,967,000 

946,000 

33,948,000 

The  large  figures  under  "  Miscellaneous,"  1816-1820,  are 
due  to  the  inclusion  of  the  delayed  internal  and  direct  taxes, 
as  stated  in  the  table,  page   140;  and  in    1827    to    receipts 


§75]  Receipts  and  Expenditures.  169 

from  Great  Britain  on  account  of  property  seized  during  the 
War  of  1812,  amounting  to  $1,205,000. 

After  182 1  expenditures  for  the  military  and  naval  establish- 
ments varied  little  from  year  to  year ;  while  not  brought  down 
to  the  level  which  prevailed  before  the  war,  the  per  capita 
burden  was  on  the  whole  no  greater.  Pensions  now  for  the 
first  time  became  an  important  item  in  the  budget ;  by  the  act 
of  March  18,  181 8,  pensions  were  granted  to  all  Revolution- 
ary soldiers  on  the  basis  of  service  and  poverty,  discarding 
the  previous  qualification  of  disability.  Fraudulent  claims  on 
a  large  scale  followed,  which  led  to  an  amendment  of  the  law 
by  requiring  more  rigid  examination  of  an  applicant's  material 
welfare.  Some  beginning  was  made  in  appropriations  for 
internal  improvements,  a  topic  which  will  be  subsequently 
treated.  The  great  decrease  in  total  expenditures  as  seen  in 
the  following  table  was  due  to  the  reduction  and  final  elimina- 
tion of  interest  charges  on  the  public  debt. 

Expenditures  by  years  1816  to  1833  were  as  follows  :  — 


War 

Navy 

Pensions 

Interest 
on  debt 

Miscella- 
neous1 

Total 

1816 

$16,012,000 

$3,908,000 

$189,000 

$7,823,000 

$3,264,000 

$31,196,000 

1817 

8,004,000 

3,314,000 

297,000 

4,536,000 

3,838,000 

19,990,000 

1818 

5,622,000 

2,953,000 

890,000 

6,209,000 

4,341,000 

20,OI7,COO 

1819 

6,506,000 

3,847,000 

2,415,000 

5,211,000 

3,530,000 

21,511,000 

1820 

2,630,000 

4,387,000 

3,208,000 

5,151,000 

2,907,000 

18.285,000 

1821 

4,461,000 

3,319,000 

242,000 

5,126,000 

2,700,000 

15,849,000 

1822 

3,111 ,000 

2,224,000 

1,948,000 

5, 172,000 

2,542,000 

14,999,000 

1823 

3,096,000 

2,503,000 

1,780,000 

4,922,000 

2,402,000 

14,706,000 

1824 

3,340,000 

2 ,904,000 

1,499,000 

4,943,000 

7,585,000 

20,273,000 

182s 

3,659,000 

3,049,000 

1,308,000 

4,366,000 

3,472,000 

15,856,000 

1826 

3,943,000 

4,218,000 

1,556,000 

3,975,000 

3,343,000 

17,037,000 

1827 

3,948,000 

4,263,000 

976,000 

3,486,000 

3,463,000 

16,139,000 

1828 

4,145.000 

3,918,000 

850,000 

3,098,000 

4,381,000 

16,394,000 

1829 

4,724,000 

3,308,000 

949,000 

2,542,000 

3,658,000 

15,183,000 

1830 

4,767,000 

3,239,000 

1,363,000 

:, 912, 000 

3,859,000 

15,141,000 

183 1 

4,841,000 

3,856,000 

1,170,000 

i,373,ooo 

3,995,000 

15,237,000 

1832 

5,446,000 

3,956,000 

1,184,000 

772,000 

4,929,000 

17,288,000 

1833 

6,704,000 

3,901,000 

4,589,000 

303,000 

6,518,000 

23,017,000 

1  Including  Indians. 


A  comparison  of  the  receipts  with  expenditures  and  the 
resulting  changes  in  the  debt  give  the  following  table  in 
millions  of  dollars  :  — 


1 70  Reorganization  after  War.  [§  76 


Year 

Receipts 

Expendi- 
tures 

Surplus 

Deficit 

Taxes 

Other 

Total 

1816 
1817 
1818 
1819 
•  820 

1821 
1822 
1823 
1824 
1825 
1826 
1827 
1828 
1829 
1830 
1831 
1832 
1833 

45-7 
3°-7 
18.3 
20.6 
15.1 
13.0 
17.7 
19.1 
179 
20.1 

23-3 
19.7 
23.2 
22.6 
21.9 
24.2 
28.4 
29.0 

20 

2-3 

3-2 

4.0 
2.7 

••5 

2-5 

i-4 
1.4 
'•7 
•9 

»        3-2 

i-5 
2.2 
2.9 
4-3 
3-4 
4.9 

47-7 
33o 

21-5 

24.6 
17.8 

14  5 
20.2 
20.5 
19.3 
21.8 
25.2 
22.9 
24.7 
24.8 
24.8 

28| 
31.8 

33-9 

31.2 
19.9 
20.0 
21.5 
18  2 
15.8 
14.9 
14.7 
20.2 
15.8 
17.0 
16. 1 
16.3 
15.1 
•5-i 
15.2 
17  2 
23  0 

16.5 

131 

'•5 

3-' 

S-3 

5.8 

6.0 
8.2 
6.8 
8.4 
9  7 
9-7 
•3  3 
14.6 
10.9 

■4 
«•! 

•9 

76.    Difficulties  in  Management  of  the  Funded  Debt. 

After  1822  the  principal  difficulty  in  managing  the  debt 
was  due  to  surpluses  which  constantly  accrued  and  could  not 
be  conveniently  used  in  liquidation  of  the  public  debt  except  by 
the  purchase  of  government  securities  bought  at  a  premium 
in  the  open  market.  As  the  war  loans  for  181 2  to  181 6  ran  for 
twelve  years,  there  was  little  opportunity  for  free  application  of 
surplus  revenue  to  debt  extinguishment.  In  1826  $19,000,000 
became  due;  in  1827  another  large  block  fell  in, — each 
much  more  than  the  sinking  fund  could  discharge;  in  1829 
and  1830,  however,  no  part  of  the  public  debt  was  to  fall 
due.  Policy  suggested  that  the  excess  of  debt  which  could 
not  be  discharged  in  1826  and  1827  should  be  thrown  in 
equal  proportions  upon  those  years  in  which  nothing  was 
payable.  Three  attempts  consequently  were  made  to  refund 
the  debt  under  provisions  by  which  annual  payments  might  be 
made  and  the  interest  charge  lowered.  None  of  these  were 
successful  because  of  the  low  rate  of  interest  offered,  the  brief 
period  before  redemption,  and  the  growing  activity  in  com- 
mercial and  manufacturing  operations  which  afforded  induce- 


§76]  The  Funded  Debt.  171 

ments  to  the  investment  of  capital.     Under  the  act  of  May  26, 

1824,  conversions  were  made  into  stock  at  4^  per  cent,  inter- 
est;  $4,454,000  redeemable  in  eight  or  nine  years,  and 
$5,000,000  redeemable  any  time  after  1831 .  Other  slight  con- 
versions, $1,539,000,  were  made  under  the  act  of  March  3, 

1825.  So  favorable  were  the  finances  that  after  1825,  in  spite 
of  the  handicap  incident  to  fixed  loans,  the  debt  was  rapidly 
paid  off. 

In  reorganizing  the  finances  at  the  close  of  the  war  an 
important  change  was  made  in  the  arrangement  of  the  sinking 
fund.  When  the  annual  payment  was  increased  to  $10,000,000 
in  1 81 7  there  stood  on  the  books  of  the  treasury  to  the  credit 
of  the  commissioners  of  the  sinking  fund  nearly  $34,000,000 
stock  of  fourteen  different  descriptions  and  bearing  seven  differ- 
ent rates  of  interest ;  interest  as  it  accrued  was  paid  into  the 
fund  with  no  other  effect  than  of  adding  to  the  labors  of  those 
who  wished  to  understand  the  accounts  of  the  government. 
It  seemed  best  to  simplify  the  operations  of  the  fund,  and 
therefore  it  was  ordered  that  all  certificates  of  public  debt 
when  redeemed  should  be  destroyed.  "  In  the  redemp- 
tion plan  of  181 7,"  says  Ross,  "the  sinking  fund  reaches 
almost  the  extreme  of  simplicity.  It  is  true  the  payment 
on  behalf  of  the  public  debt  still  went  to  a  separate  account, 
and  was  payable  in  theory  to  a  special  board.  But  the  cun- 
ning and  complicated  apparatus  of  Hamilton  and  the  English 
financiers  had  been  done  away  with.  There  was  no  fixed 
payment  on  account  of  the  principal  of  the  debt,  no  invio- 
lable appropriation,  no  sinking  fund  composed  of  specific 
items  of  revenue,  no  contract  with  the  creditors,  no  automatic 
purchasing  machinery,  no  borrowing  on  behalf  of  the  fund, 
no  hoarding  of  paid-off  debt,  and  no  payment  of  interest 
thereon."  1 

1  Ross,  Pub.  of  Amer.  Econ.  Assn.,  vol.  7,  p.  384. 


CHAPTER  VIII. 
TARIFF  LEGISLATION,  1818-1833. 

77.  References. 

Bibliographies:  Charming  and  Hart,  364,  370-372;  W.  MacDonald, 
Select  Documents,  284    (1833). 

Tariff:  (i)  Sources,  American  State  Papers,  Finance  III,  234-240 
(Secretary  Crawford,  Jan  20,  1818),  440,  526,  563,  582,  594-660  (me- 
morials, etc.,  1820-1821) ;  IV,  467,  482  (memorials,  1824) ;  V,  656,  et  seq. 
(memorials,  1827-1828),  778-845  (report  of  Mallary,  Jan.  31,  1828);  Fi- 
nance Reports,  II,  223  (Crawford,  1822),  319-326  (Rush,  1825),  361-365 
(Rush,  1826),  396-411  (Rush,  1827);  III,  232  (McLane,  1831),  289-293 
(McLane,  1832)  ;  Annals  of  Congress,  16th  Cong.,  2d  Sess.  (1820);  18th 
Cong.,  1st  Sess.,  Part  II  (1824);  Register  0/  Debates,  20th  Cong.,  1st 
Sess.  (1828);  22d  Cong.,  2d  Sess.  (1833);  or  Benton's  Abridgment,  VI, 
601-651  (1820);  VII,  568  et  seq.;  VIII,  9-37  (1824);  IX,  589  et  seq. ; 
X,  54-118  (1828);  XI,  44-107  et  seq.  (1832);  XII,  81-181  (1833);  Mes- 
sages and  Papers,  II,  106,  191  (Monroe);  413  (Adams);  449,  523,  597, 
(Jackson)  ;  Statutes,  III,  460,  461  (1818) ;  IV,  25  (1825) ;  270  (1828)  ;  403, 
4X3  ('830) ;  583,  629  (1833) ;  E.  Young,  Customs  Tariff  Legislation,  xli-1, 
(1824),  1-lxviii  (1828),  lxxh  (1832),  lxxxiii  (1833);  W.  MacDonald,  Select 
Documents,  231-237  (protests  of  S.  C.  and  Ga.,  1828)  ;  H.  Clay,  Speeches 
(ed.  1857)  I,  218-237  (1820),  254-294(1824),  416-428,437-486  (1832),  536- 
569  (1833) ;  H.  Clay  in  American  Orations,  III,  338-373  (1832) ;  J.  Madi- 
son, Letters,  III,  430;  IV,  232;  J.  C.  Calhoun,  Works  (ed.  1853);  II, 
163-172;  D.  Webster,  Works,  III,  94-149  (1824),  228-237  (1828) ;  T.  H. 
Benton,  Thirty  Years  in  the  U.  S.  Senate,  I,  95-102  (1828),  265-275 
(1832),  297-346  (1833)  ;  Report  of  Committee  of  Citizens  of  Boston  (1828) ; 
A.  Gallatin,  Free  Trade  Memorial,  in  State  Papers  and  Speeches  (Taussig 
ed.),  108-210  (1831).  (ii)  Special:  Bolles,  II,  370-433;  F.  W.  Taussig, 
Tariff  History,  19-24,  31-36,40-45,  50-67,  68-112  (additional  references 
in  foot-notes);  O.  L.  Elliott,  The  Tariff  Controversy,  215-268;  U.  Rab- 
beno,  American  Commercial  Policy,  146-183;  D.  F.  Houston,  Study  of 
Nullification  in  S.  C.  (1896),  see  "  Tariff  "  in  index ;  W.  M.  Grosvenor, 
Does  Protection  Protect?  125-131,  141-145,  176-201;  S.  B.  Harding, 
Minimum  Principle  in  the  Tariff  of  1828,  in  Annals  Amer.  Acad.  Pol. 
Sci.,  VI,  100-114;  H.  P.  Winston,  Tariff  and  the  Constitution,  in  Journal 
of  Polit.  Econ.,Y,  40-70  (valuable  references),  (iii)  General:  W.  G. 
Sumner,  fackson,  194-206  (1816-1828);  207-223,281-291   (nullification); 

172 


§78]     Struggle  for  Increased  Protection.      173 

C.  Schurz,  Henry  Clay,  I,  213-221  (1824);  356-366;  II,  1-22  (nullifica- 
tion) ;  H.  C.  Lodge,  Webster,  156-166  (position  in  1828) ;  H.  von  Hoist, 
Calhoun,  66-78  (nullification) ;  H.  von  Hoist,  Constitutional  History  of 
the  U.  S.,  I,  402-408;  J.  Parton,  Life  of  fackson,  III,  34-36  (1824),  433 
et  seq.  (nullification)  ;  J.  G.  Blaine,  Twenty  Years  in  Congress,  I,  189-192 ; 
H.  Adams,  Life  of  Gallatin,  640-642  (1832);  McMaster,  IV,  510-521 
(1820);  V,  229-267  (1820-1828);  Schouler,  III,  420-426  (1828);  IV,  54- 
109  (1833);  Stanwood,  I,  160-409. 

Customs  Administration:  Finance  Reports,  III,  11-16  (Ingham, 
1829),  91-94  (1830)  ;  Statutes,  I,  627  ;  III,  433 ;  IV,  270,  409  ;  J.  D.  Goss, 
History  of  Tariff  Legislation  (Stud.  Columbia  Col.,  1891),  27-47;  Bolles, 
II,  478-499- 


78.   Struggle  for  Increased  Protection ;  Tariff  of  1824. 

The  principal  financial  question  in  the  decade  1820-1830 
relates  to  the  frequent  changes  in  the  tariff,  which  finally 
reached  an  average  of  duties  entirely  unanticipated  and  dis- 
turbing in  its  results.  The  framing  of  the  successive  schedules, 
however,  was  hardly  a  fiscal  process ;  any  full  treatment  of 
tariff  history  during  this  period  would  require  not  only  careful 
inquiry  into  the  economic  development  of  the  country,  but 
also  a  study  of  the  growing  sectional  antagonism  between  the 
North  and  South  and  of  underlying  political  theories.  The 
tariff  act  of  181 6  had  hardly  gone  into  effect  before  it 
was  regarded  as  incomplete ;  for  while  protection  had  been 
granted  to  the  textile  industries,  and  especially  to  cotton 
manufactures,  no  acceptable  provision  had  been  made  for  the 
iron  interest.  American  iron  producers  suffered  competition 
on  the  one  side  from  England,  whose  pig  and  rolled  iron 
were  manufactured  at  a  lower  cost  of  production  on  account  of 
the  almost  universal  use  of  coke ;  and  on  the  other  from  the 
charcoal  iron  of  Sweden  and  Russia,  where  forests  were  extensive 
and  labor  was  cheap.  By  a  special  tariff  act  April  20,  18 18, 
the  duties  on  iron  were  raised,  and  at  the  same  time  the 
protective  principle  was  further  recognized  by  postponing  the 
reduction  of  the   duties  on  cotton  and  woollens  until  1826. 

Influenced  by  the  industrial  and  financial  distress  of  18 19, 
which  caused  unfavorable  treasury  balances,  Secretary  Crawford 


174       Tariff  Legislation,  18 18-1833.        [§78 

recommended  in  successive  reports  a  change  in  the  tariff  for 
the  purpose  of  increasing  the  revenue,  and  he  distinctly  voiced 
a  protective  note  :  "  It  is  believed  that  the  present  is  a  favorable 
moment  for  affording  effective  protection  to  that  increasing  and 
important  interest  [i.e.,  cotton,  woollen,  and  iron  manufactures] 
if  it  can  be  done  consistently  with  the  general  interest  of  the 
nation."  It  was  urged  that  higher  duties  would  bring  foreign 
capital  and  labor  to  the  United  States>  and  incorporate  them  into 
the  domestic  resources  of  the  Union.  Manufacturers  also  called 
for  more  generous  protection  because  of  the  fall  of  prices 
which  took  place  with  the  resumption  of  specie  payments,  and 
also  to  meet  the  rush  of  imports  from  England  at  the  close  of 
the  Continental  Wars.  In  spite  of  this  open  encouragement 
by  the  administration  the  attempt  in  1820  to  raise  duties  was 
unsuccessful ;  the  bill  passed  the  House  but  was  defeated  in  the 
Senate  by  one  vote.  The  administration  continued  its  recom- 
mendations for  increase  of  duties,  and  this  question  along 
with  that  of  internal  improvements  began  to  affect  national 
parties  and  presidential  campaigns.  In  1824  a  general  revision 
was  entered  upon  ;  further  protection  was  granted  to  the  manu- 
facturers of  wool,  iron,  hemp,  lead,  and  glass  ;  and  duties  were 
raised  on  silk,  linens,  cutlery,  and  spices.  A  specific  duty  was 
imposed  upon  raw  wool,  and  wool-growers  for  the  first  time 
became  an  important  factor,  in  the  framing  of  American  tariffs. 
The  principle  of  minimum  value  was  extended  from  cotton  to 
woollen  goods  ;  hemp  manufactures  were  taxed  25  per  cent. ; 
and  on  cotton  goods  the  minimum  valuation  was  raised  so 
as  to  protect  certain  finer  grades  of  fabric. 

The  clashing  of  sectional  interests  was  clearly  apparent  in 
the  debate  upon  this  measure.  In  general  the  bill  was 
supported  by  a  combination  of  the  Western  and  Middle 
States,  and  opposed  both  by  the  planting  interests  of  the  South 
and  by  commercial  interests  in  the  East.  By  sections  the 
vote  in  the  House  of  Representatives  was  as  follows  :  — 


78]     Struggle  for  Increased  Protection.      175 


In  favor 

Opposed 

West 

15 
60 
18 

•3 

23 
iS 
0 

57 

7 

Southwest  (Tennessee  and  Kentucky) 

I07 

102 

Iron,  wool,  hemp,  glass,  and  lead  were  allied  against  com- 
merce. Kentucky  desired  protection  for  its  dew-rotted  hemp, 
which  suffered  from  the  competition  of  the  water-rotted  hemp 
of  Russia ;  the  Middle  States  and  Ohio  desired  a  higher  tax 
on  wool ;  Pennsylvania  was  firm  for  additional  duties  on  iron. 
In  New  England  the  States  of  Maine,  New  Hampshire,  and 
Massachusetts  gave  but  3  votes  in  favor  to  22  in  opposition. 
Webster  at  this  time  represented  a  commercial  district  of 
Boston,  and  his  speeches  well  illustrate  the  attitude  of  the 
navigating  and  importing  interests  of  a  section  of  New  England. 
A  few  years  earlier,  in  1820,  in  a  speech  at  Faneuil  Hall  before 
a  public  meeting  called  to  protest  against  an  increase  of  duties, 
he  declared,  "  I  feel  no  desire  to  push  capital  into  extensive 
manufactures  faster  than  the  general  progress  of  our  wealth 
and  population  propels  it.  I  am  not  in  haste  to  see  Sheffields 
and  Birminghams  in  America.  It  is  the  true  policy  of  govern- 
ment to  suffer  the  different  pursuits  of  society  to  take  their  own 
course,  and  not  to  give  excessive  bounties  or  encouragements 
to  one  over  another."  And  in  1824  his  speech  in  Congress 
in  favor  of  freedom  of  trade  was  exhaustive,  and  proved  to  be 
a  troublesome  stumbling-block  when  New  England  later 
changed  to  the  protective  principle.  Owing  to  the  protest  of 
such  leaders  the  act  of  1824  fell  far  short  of  the  protection 
proposed  in  the  bill  originally  introduced.  The  woollen  manu- 
facturers complained  of  the  inconsistent  treatment  of  their 
staple ;  for  the  duty  on  raw  wool  had  been  increased  more 
than  that  on  the  finished  product,  and  the  sheep  flocks  in  the 
United  States  could  not  supply  more  than  one-half  of  the  wool 


176       Tariff  Legislation,  1818-1833.        [§79 

needed.  The  duty  on  imported  woollens,  the  cost  of  which 
exceeded  33*4  cents  per  yard,  was  raised  from  25  to  33^$ 
per  cent. ;  the  tax  on  raw  wool  was  increased  from  a  level  ad 
valorem  rate  of  15  per  cent,  to  a  progressively  increasing  duty 
of  30  per  cent,  on  all  wool  costing  over  10  cents  per  pound, 
and,  this,  it  was  estimated,  destroyed  at  least  5  per  cent,  of  the 
new  duty  on  cloth.  There  is  thus  early  seen  an  illustration  of 
the  difficulty  —  absolutely  insoluble  —  of  adjusting  the  interests 
of  wool-growers  and  cloth  manufacturers  to  their  common 
satisfaction.  Wool  manufacturers  complained  also  of  the 
duties  on  the  raw  materials  entering  into  their  business,  such 
as  olive  oil  and  castile  soap,  and  when  they  looked  abroad 
they  saw  new  evils  to  contend  with.  England  had  reduced 
her  duty  on  raw  wool,  giving  to  manufacturers  of  that  country 
an  advantage  in  foreign  competition  which  they  had  not 
hitherto  enjoyed. 

The  old  abuse  of  undervaluation  of  imports  was  growing 
more  serious,  so  that  the  schedule  of  ad  valorem  duties  did 
not  give  the  degree  of  protection  which  might  have  been 
expected.  A  large  part,  some  say  four-fifths,  of  the  wool 
manufactures  were  imported  by  and  on  account  of  foreigners, 
a  practice  which  afforded  opportunity  for  extremely  low  valua- 
tions. The  industrial  crisis  of  1825  in  England  also  served 
to  throw  upon  the  American  market  a  large  amount  of  goods 
to  be  sold  at  bankrupt  prices,  and  embarrassment  was  occa- 
sioned by  over- expansion  of  industry  after  the  long  period  of 
depression,  which  in  many  instances  led  to  a  ruinous  domestic 
competition. 

79.   Tariff  of  1828. 

From  1824  there  was  unceasing  agitation  of  the  tariff,  headed 
by  the  woollen  manufacturers,  who  insisted  upon  higher  duties. 
Massachusetts  now  took  a  prominent  part  in  the  discussion, 
and  Webster's  constituents  imposed  upon  him  the  awkward  duty 
of  presenting  to  the  House  of  Representatives  resolutions  passed 
by  the  legislature  asking  for  further  protection  to  woollens.     In 


§79]  Tariff  of  1828.  177 

January,  1827,  the  so-called  Mallary  bill  was  reported  in 
harmony  with  these  demands ;  it  aimed  particularly  at  a  full 
establishment  of  the  minimum  principle ;  but,  though  it  passed 
the  House,  it  was  lost  in  the  Senate  by  the  casting  vote  of  the 
vice-president,  Calhoun.  The  failure  of  the  Mallary  bill  led 
to  an  important  development  in  the  contest  for  higher  duties, 
in  spite  of  the  fact  that  business  had  regained  its  courage  after 
the  slight  depression  of  1825-1826,  and  that  prosperity  at  the 
moment  seemed  wide-spread.  The  cotton  industry  had  be- 
come more  thoroughly  established  during  this  period ;  a  be- 
ginning had  been  made  in  the  exportation  of  cotton  goods  ; 
and  the  cotton  manufacturers  were  not  eager  for  a  revision  of 
the  tariff.  The  experience  of  seventy  years  has  shown  that 
claims  for  assistance  from  government  cannot  stand  isolated 
upon  their  special  merits,  but  that  the  demand  of  one  interest 
starts  up  appeals  from  all.  The  agitation  by  the  woollen  in- 
dustry consequently  led  to  a  general  campaign  for  increased 
protection;  in  1827  a  convention  of  the  friends  of  protection 
was  held  in  Harrisburg,  and  a  scheme  for  a  thorough-going 
protective  policy  was  set  forth  in  a  memorial  to  Congress  and 
in  an  address  to  the  people. 

The  enlargement  of  the  plan  of  attack  so  as  to  include  the 
whole  circle  of  manufacturing  interests  led  to  unforeseen 
political  complications  and  intrigues,  which  in  turn  resulted 
in  a  tariff  act,  approved  as  a  whole  by  few  if  any  of  the  intelli- 
gent advocates  of  the  protective  principle,  and  calculated  to 
excite  the  intensest  irritation  on  the  part  of  sections  and  in- 
terests not  directly  benefited.  Clay,  Adams,  and  Jackson  were 
all  candidates  for  the  presidency,  and  the  tariff  question  was 
raised  to  such  prominence  in  the  contest  that  it  became 
necessary  for  each  to  make  a  public  statement  of  his  position. 
As  far  as  the  record  went  there  was  little  to  choose ;  they  were 
all  protectionists  ;  Clay  and  Adams  were  advocates  and  propa- 
gandists, and  even  Jackson  in  1824,  in  a  letter  much  talked  about, 
had  frankly  stated  his  approval  of  "adequate  and  fair  protection." 
He  rang  the  changes  on  the  home  market  idea  and  concluded 


178       Tariff  Legislation,  1818-1833.       [§79 

that  "  it  is  time  we  should  become  a  little  more  Americanized, 
and,  instead  of  feeding  the  paupers  and  laborers  of  Europe, 
feed  our  own,  or  else  in  a  short  time  by  continuing  our 
present  policy  we  shall  all  be  paupers  ourselves."  Jackson's 
friends  apparently,  however,  thought  it  wise  in  1828  to  be 
more  wary,  and  so  clinch  Jackson's  election  to  the  presidency ; 
it  would  not  do  to  alienate  a  possible  following  in  the  North, 
while  in  the  Southern  States  with  the  growing  hostility  to  pro- 
tection no  candidate  openly  avowing  the  newer  protection 
as  the  guide  of  his  political  life  could  hope  for  success. 
Recourse  was  consequently  had  to  political  strategy,  which  it 
was  hoped  would  prevent  legislation  and  sufficiently  befog 
public  opinion  to  make  it  easy  for  Jackson's  friends  to  win 
support  both  North  and  South. 

The  details  of  this  intrigue  are  well  worth  recounting,  for 
they  illustrate  the  willingness  of  politicians  during  the  second 
quarter  of  the  century  to  sacrifice  clear-cut  conviction  to 
political  expediency.  At  the  time  no  satisfactory  explanation 
was  given  for  the  astonishing  law  of  1828,  but  later  Calhoun 
publicly  stated  the  facts  as  he  understood  them.  The  House 
committee  on  manufactures  was  so  organized  as  to  give 
control  to  the  friends  of  Van  Buren,  who  were  supporting 
Jackson  in  the  Middle  and  Western  States.  The  plot  was 
to  report  a  bill  protective  in  character  but  carrying  such  high 
duties  on  raw  materials  that  it  would  be  extremely  burden- 
some to  the  manufacturers  of  New  England ;  the  dissatisfied 
elements  were  then  expected  to  join  with  the  South,  which 
was  opposed  to  protection  in  any  form,  and  their  combined 
effort  could  prevent  the  passage  of  any  bill.  Thus  the  prestige 
of  Adams  and  Clay  would  be  weakened  and  Jackson  would  not 
be  committed.  McDuffie  on  a  later  occasion  confessed  as  to 
his  motives  in  regard  to  the  measure,  "  We  saw  that  this  system 
of  protection  was  about  to  assume  gigantic  proportions  and  to 
devour  the  substance  of  the  country,  and  we  decided  to  put 
such  ingredients  in  the  chalice  as  would  poison  the  monster 
and  commend  it  to  his  own  lips." 


§79]  Tariff  of  1828.  179 

The  first  part  of  the  program  was  successfully  carried  out ; 
the  Committee's  bill  recommended  an  increase  not  only  on 
hammered  and  bar  iron,  but  also  on  pig  and  rolled  iron,  con- 
cerning which  even  the  Harrisburg  protectionist  convention 
had  made  no  request.  The  duty  on  hemp,  which  was  in- 
creased nominally  in  behalf  of  the  Kentucky  product,  naturally 
added  to  the  expense  of  rope-makers,  shipbuilders,  and  ship- 
owners, and  the  duty  on  wool  was  changed  to  a  mixed  specific 
and  ad  valorem  duty,  in  order  to  make  effective  the  taxation 
of  the  coarse  and  cheaper  varieties  of  wool  in  the  production 
of  which  American  farmers  took  little  interest.  On  coarse 
woollen  goods,  used  largely  by  the  slaves  in  the  South,  low 
duties  were  continued,  but,  what  was  more  objectionable,  the 
minimum  valuation  for  the  first  time  was  applied  to  woollens. 
The  Harrisburg  convention  recommended  that  all  woollen 
goods  between  40  cents  and  $2.50  a  yard  be  valued  at  the 
higher  sum ;  the  committee,  however,  inserted  a  minimum 
point  at  $1.00;  recommended  doubling  the  duty  on  molasses, 
and  struck  out  the  customary  drawback  on  exported  rum 
which  had  been  distilled  from  imported  molasses.  These 
provisions  were  obviously  oppressive  to  many  established  in- 
dustries in  the  North  and  Pennsylvania,  and  it  was  supposed 
that  the  burdens  were  made  so  heavy  that  a  revolt  would 
follow. 

The  plans  miscarried ;  the  bill  was  indeed  made  odious,  but 
so  strong  was  the  protective  sentiment  that  the  measure  found 
acceptance  in  each  branch  of  Congress.  Its  predominating 
note  was  protection  to  the  woollen  manufacturers,  and  the  meas- 
ure is  frequently  referred  to  as  the  "  Woollen  Tariff."  Raw 
wool  also  received  further  protection;  under  the  act  of  1824  it 
was  taxed  30  per  cent,  ad  valorem,  while  under  this  bill  it  was 
subject  both  to  an  ad  valorem  duty  of  40  per  cent,  and  to  a 
specific  duty  of  4  cents  a  pound,  —  the  first  compound  duty  in 
the  tariffs  of  the  United  States.  With  some  exceptions  all 
woollen  cloths  paid  45  per  cent,  ad  valorem  ;  all  cloths  costing 
not  to  exceed  50  cents  were  valued  at  that  sum,  cloths  costing 


180       Tariff  Legislation,  181 8-1833.       [§79 

50  cents  to  $1.00  were  valued  at  #1.00,  those  costing  $1.00  up 
to  $2.50  were  valued  at  $2.50,  those  between  $2.50  and  $4.00 
as  if  worth  #4.00,  and  those  exceeding  #4.00  in  value  were 
taxed  50  per  cent,  ad  valorem.  We  have  in  this  complicated 
schedule  practically  an  extension  of  the  minimum  principle  first 
applied  to  cottons  in  1816.  The  insertion  of  a  minimum  at 
$1.00  was  regarded  by  many  protectionists  as  a  traitorous  blow 
at  their  system ;  it  offered  a  great  temptation  to  undervalue 
goods  which  cost  above  the  $1.00  limit  so  as  to  secure  the  ad- 
vantages of  the  lower  rate,  and  the  results  quickly  showed 
themselves  in  fraudulent  undervaluations.  In  spite  of  the 
forcibly  expressed  disappointment  of  woollen  manufacturers  at 
that  time  the  act  of  1828  in  later  years  came  to  hold  a  proud 
position  in  the  hearts  of  protectionists. 

The  tariff  act  of  1828  represented  the  high- water  mark  of 
protective  legislation  before  the  Civil  War;  it  was  generally 
condemned,  and  derisively  termed  the  "  Black  Tariff"  and  the 
"Tariff  of  Abominations."  It  also  led  to  important  political 
results  in  the  development  of  nullification  in  South  Carolina. 
As  in  1824,  so  in  1828,  the  votes  on  the  tariff  do  not  throw 
much  light  on  party  opinion ;  support  was  sectional  as  well  as 
factional,  as  is  seen  in  the  following  distribution  of  the  votes 
in  the  House  of  Representatives  :  — 


In  favor 

Opposed 

West 

16 
57 
17 
3 
12 

23 

11 

1 

So 
9 

Southwest  (Tennessee  and  Kentucky) 

Total 

IO5 

94 

From  the  South  there  was  strong  opposition  to  the  tariff,  and 
yet  in  the  Senate  Benton  of  Missouri  and  R.  M.  Johnson  of 
Kentucky  voted  in  its  favor.  It  also  received  the  support  of 
the  Northern  Democrats,  Van   Buren,    Buchanan,    and    Silas 


§  80]     Intense  Opposition  to  the  Tariff.       1 8 1 

Wright.  In  the  House  the  entire  delegation  of  Kentucky, 
Clay's  State,  voted  in  favor,  while  Jackson's  State,  Tennessee, 
was  unanimously  against  it.  Massachusetts,  which  had  vigor- 
ously engaged  in  manufacturing  under  the  stimulus  of  the  tariff 
of  1824,  was  now  divided  :  its  delegation  in  the  House  of  Rep- 
resentatives voted  almost  solidly  against  it,  while  Webster  in  the 
Senate  made  a  powerful  speech  in  its  support,  and  confessed  his 
conversion  to  the  protective  doctrine  under  stress  of  circum- 
stances;  since  New  England  had  accepted  the  act  of  1824, 
and  had  entered  upon  manufactures  with  an  earnest  purpose, 
the  nation  was  bound  to  fulfil  the  hopes  which  had  been 
extended. 

80.  Intense  Opposition  to  the  Tariff. 

The  act  of  1828  rekindled  in  the  Southern  States  an  oppo- 
sition to  the  protective  policy.  A  contest  was  inevitable,  for 
the  industrial  interests  of  the  South  and  the  rest  of  the  country 
were  profoundly  different.  The  South  with  its  natural  advan- 
tages for  the  growing  of  cotton,  rice,  and  tobacco,  and  with 
abundant  rude  slave  labor,  was  devoted  solely  to  the  produc- 
tion of  a  few  staple  agricultural  commodities,  and  witnessed 
with  indifference  if  not  with  impatience  the  building  up  of 
diversified  industries  and  manufacturing  cities.  Indifference 
and  impatience  were  converted  into  open  hostility  as  soon  as 
it  was  felt  that  this  development  was  at  the  expense  of  its 
own  profit.  By  her  natural  resources  the  South  was  equipped 
for  a  magnificent  development  of  manufactures.  The  two  great 
raw  materials  cotton  and  iron  belonged  to  her  inheritance ; 
she  had  abundant  water-power  and  fuel ;  but  the  institution 
of  slavery  necessarily  restricted  the  productive  genius  of  the 
South  and  forced  her  industries  into  grooves  from  which  there 
then  seemed  no  escape.  The  interest  of  the  South  obviously 
lay  in  free  trade  with  England,  which  was  its  principal  cus- 
tomer for  cotton,  hemp,  and  tobacco ;  and  it  was  ingeniously 
reasoned  that  a  tax  on  imports  was  in  incidence  a  tax  on 
exports. 


1 82       Tariff  Legislation,  181 8-1833.       [§80 

Politically  the  act  of  1828  gave  strength  to  the  develop- 
ment of  the  nullification  doctrine,  or  the  right  of  an  individual 
State  to  declare  a  federal  law  null  and  void  within  State  limits. 
As  early  as  1825  the  legislature  of  South  Carolina  had  adopted 
resolutions  declaring  that  protective  duties  were  unconstitu- 
tional ;  in  1827  the  destructive  policy  of  nullification  was 
proposed  at  a  public  dinner  in  that  State ;  and  after  the 
passage  of  the  law  of  1828  tariff  meetings  were  held  in  the 
more  important  towns  of  that  State,  and  threats  made  that 
South  Carolina  would  separate  from  the  Union  unless  the  new 
tariff  laws  were  repealed.  Calhoun  then  renounced  without 
reservation  the  national  views  which  had  governed  his  vote  in 
1 81 6  and  as  leader  of  the  movement  declared  that  the  tariff 
act  was  unconstitutional  and  must  be  destroyed.  Great  were 
the  hopes  entertained  that  Jackson,  a  Southern  planter  and 
slaveholder,  would  feel  sympathy  with  this  anti-tariff  protest ; 
South  Carolina  earnestly  supported  him  for  the  presidency, 
and  for  a  time  after  the  first  burst  of  indignation  awaited  his 
declarations  in  hopeful  anticipation. 

Jackson  proved  to  be  lukewarm,  and  it  was  even  suspected 
that  he  cared  little  to  reduce  the  tariff  but  was  rather  in 
favor  of  distributing  the  surplus.  Unsuccessful  attempts  were 
made  to  reduce  the  duties  on  woollens,  cottons,  iron,  hemp, 
flax,  molasses,  and  indigo  to  the  rates  existing  previous  to 
1824.  The  most  that  could  be  accomplished  was  the  reduc- 
tion of  the  duties  on  salt,  molasses,  coffee,  and  tea,  May  20 
and  29,  1830;  but  the  lowering  of  rates  on  articles  in  which 
domestic  manufacturers  were  not  interested  could  hardly  be 
regarded  as  a  weakening  of  the  protective  policy.  The  pro- 
tectionists moreover  added  to  their  triumphs  by  the  pas- 
sage of  a  bill  providing  that  custom-house  appraisals  be 
made  more  stringent  and  effective.  The  high-tariff  party 
was,  however,  in  perplexity  because  impost  duties  were  still 
so  productive  that  the  revenue  ran  into  surpluses  with  the 
prospect  of  a  speedy  extinction  of  the  debt.  Hence  Clay  in 
1830  introduced  a  resolution  into  the  Senate  providing  that 


§  81]  Tariff  of  1832.  183 

duties  upon  articles  imported  from  foreign  countries  and  not 
coming  in  competition  with  the  industries  of  the  United  States 
ought  to  be  forthwith  abolished,  except  the  duties  on  wines 
and  silks;  and  that  those  ought  to  be  reduced.  In  1831 
representative  national  meetings  of  the  advocates  of  protec- 
tion and  of  free  trade  were  held,  —  the  former  in  New  York 
and  the  latter  in  the  protectionist  stronghold,  Philadelphia. 
Each  appealed  to  the  people  and  to  Congress  in  memorials 
which  summarized  the  representative  arguments  of  the  day. 

81.  Tariff  of  1832. 

The  "abominations"  of  the  tariff  of  1828  were  recognized 
by  many  Northern  manufacturers,  and  the  demands  for  a  modi- 
fication of  the  tariff  were  not  confined  to  the  South  nor  to  the 
supporters  of  free- trade  doctrines,  yet  Clay  stood  forth  to 
champion  without  essential  abatement  his  perfected  theory 
of  the  "  American  System."  When  John  Quincy  Adams, 
now  a  representative  in  the  House,  suggested  the  possible 
advantage  of  a  conciliatory  policy,  Clay  declared  that  the 
contest  was  in  a  large  measure  imaginary,  and  relying  upon 
his  power  of  argument  he  reintroduced  in  the  Senate,  Jan- 
uary 9,  1832,  his  resolutions  of  1830;  and  in  speeches  on 
four  different  days  he  elaborated  a  defence  of  the  American 
System. 

The  issue  was  made  specific  by  the  introduction  into  the 
House  of  several  tariff  propositions.  First  there  was  the  re- 
port of  the  committee  on  ways  and  means,  of  which  George 
McDuffie  was  chairman,  which  may  be  regarded  as  representa- 
tive of  the  demands  of  South  Carolina  ;  it  recommended  that 
duties  be  lowered  to  a  general  ad  valorem  duty  of  12^  per 
cent,  on  all  merchandise  excepting  on  goods  already  free,  or  on 
which  the  duties  were  less  than  12^  per  cent.  Specific  duties 
were  assailed  by  the  committee  on  two  grounds  :  first  that  they 
exacted  the  same  money  duty  on  articles  of  varying  value  ; 
and  secondly  because  a  lowering  of  the  cost  of  manufacture 
under  a  specific  duty  always    meant  an   increase   in  the   rate. 


184       Tariff  Legislation,  18  18—1833.       [§  8l 

In  this  report  also  reappears  the  argument  that  duties  on 
goods  imported  were  practically  paid  by  the  producers,  since 
the  exports  paid  for  the  imports.  Inasmuch  as  the  exports 
were  chiefly  cotton,  rice,  and  tobacco,  it  followed  from  this 
view  that  the  burden  of  import  duties  rested  on  the  South. 
A  minority  report  signed  by  two  members  of  this  committee 
was  chiefly  devoted  to  the  effect  of  the  tariff  on  prices.  A 
rival  report  submitted  April  27,  1832,  by  Louis  McLane, 
secretary  of  the  treasury,  may  be  regarded  as  the  program  of 
the  administration ;  it  proposed  to  reduce  the  average  rate 
of  duty  from  44  to  27  per  cent.,  to  reduce  the  duty  on  wool 
to  5  per  cent,  and  on  woollens  to  20  per  cent.,  and  to  abolish 
the  minimum  system  on  woollens  except  as  to  the  lowest 
qualities.  Neither  of  the  two  propositions  could  rally  a 
sufficient  support,  and  John  Quincy  Adams,  as  chairman 
of  the  committee  on  manufactures,  was  invited  to  draw  up 
a  bill.  Much  against  his  will  he  complied  in  a  systematic 
report,  dealing  with  the  whole  question  both  from  history 
and  economic  argument ;  and  finally  he  submitted  a  scheme 
of  protection  with  an  elimination  of  the  more  exasperating 
features  of  the  tariff  of  1828. 

In  the  end,  out  of  this  maze  of  conflicting  opinions, 
emerged  the  tariff  act  of  July  14,  1832,  closely  based  on 
Adams's  report.  In  substance  the  act  abolished  the  sys- 
tem of  minimum  valuation ;  reduced  the  duties  on  hemp  and 
iron,  and  admitted  free  flax  and  wool  worth  less  than  8 
cents  a  pound.  As  Taussig  observes,  "The  protective  sys- 
tem was  put  back  in  the  main  to  where  it  had  been  in  1824. 
The  result  was  to  clear  the  tariff  of  the  excrescences  which 
had  grown  on  it  in  1828,  and  to  put  it  in  a  form  in  which  the 
protectionists  could  advocate  its  permanent  retention."  Cer- 
tainly the  reduction  of  duties  was  not  based  on  any  theory 
of  free  trade.  Revenue  was  still  to  be  derived  chiefly  from 
articles  requiring  protection,  and  so  far  forth  Clay's  fundamental 
principle  was  endorsed ;  indeed,  the  tax  on  woollens  was 
raised,  and  for  the  first  time  woollen  yarn  was  taxed.     The 


§82]    Nullification;  Compromise  Tariff.     185 

philosophy  of  protection  was  also  clearly  enunciated  in  all  its 
sections,  and  the  spirit  of  nullification  was  aroused  if  anything 
to  a  higher  pitch.  By  geographical  divisions  the  vote  in  the 
House  on  the  tariff  of  1832  was  as  follows  :  — 


In  favor 

Opposed 

New  England  States 
Middle  States      .     . 

South 

Southwest  .... 

•7 

18 
27 
18 

'7 
18 

0 
27 

3 

132 

65 

The  vote  in  the  South  as  a  whole  was  equally  divided,  owing 
to  the  strong  support  which  the  measure  received  in  Virginia 
and  North  Carolina ;  in  South  Carolina  and  Georgia  the  op- 
position was  great. 


82.  Nullification ;  Compromise  Tariff. 

After  Jackson  attained  the  presidency  he  was  guarded  in 
his  deliverances  in  regard  to  the  tariff;  in  his  successive  an- 
nual messages  he  suggested  certain  changes,  but  he  did  not 
protest  against  the  tariff  of  1828  as  many  of  his  Southern  sup- 
porters expected,  nor  did  he  defeat  the  tariff  measure  of  1832. 
After  his  second  election  in  1832  he  dwelt  more  earnestly  upon 
the  necessity  of  a  revision  ;  but  South  Carolina  did  not  wait  for 
legislation,  and  on  November  24,  the  very  month  of  the  elec- 
tion, passed  a  nullification  ordinance  providing  "  that  the 
tariff  law  of  1828,  and  the  amendment  to  the  same  of  1832, 
are  null  and  void  and  no  law,  nor  binding  upon  this  State,  its 
officers  and  citizens."  It  was  also  declared  that  no  collection 
of  the  duties  enjoined  by  that  law  should  be  permitted  in  the 
State  of  South  Carolina  after  February  1,  1833  ;  neither  should 
an  appeal  from  a  South  Carolina  court  to  a  Federal  court  be 
allowed  in  any  case  arising  from  this  legislation ;  and  all  offi- 


i  86       Tariff  Legislation,  181 8-1  833.       [§82 

cers  and  jurors  were  to  take  an  oath  to  abide  by  this  provis- 
ion ;  goods  seized  by  custom-house  officers  could  be  replevined 
by  State  officers. 

This  summary  action  of  South  Carolina  was  quickly  met  by 
Jackson's  ringing  proclamation  under  date  of  December  to, 
1832  ;  Governor  Hayne  issued  a  proclamation  in  return,  and 
Calhoun,  in  order  to  be  free  in  his  action,  resigned  the  vice- 
presidency  and  was  immediately  elected  senator.  Although 
Jackson  was  decisive  in  his  rebuke  of  nullification  he  showed 
a  conciliatory  spirit,  and  Secretary  McLane  submitted  recom- 
mendations which  were  made  the  basis  of  a  congressional 
measure  known  as  the  Verplanck  Bill,  and  reported  by  the 
committee  on  ways  and  means,  December  27.  The  pro- 
posed measure  was  sweeping  in  its  provisions,  and  to  protec- 
tionists appeared  to  be  a  radical  change  of  policy  endangering 
the  manufacturing  system  as  a  whole.  In  the  first  place  it 
proposed  to  reduce  the  annual  revenue  from  $27,000,000  to 
$15,000,000;  secondly,  and  more  serious,  duties  were  to  be 
reduced  at  once,  without  giving  to  the  manufacturers  ade- 
quate time  to  adjust  themselves.  No  doubt  this  bill  would 
have  satisfied  the  extremists  of  South  Carolina,  but  to  the 
supporters  of  the  American  system  it  signified  an  industrial 
disaster.  In  this  emergency  Clay  appeared  with  a  new  bill 
known  in  history  as  the  compromise  tariff  of  1833  ;  at  bottom 
it  recognized  the  principle  of  a  horizontal  rate  which  the 
nullifiers  of  the  South  regarded  as  essential  to  revision,  but  it 
was  to  be  so  gradual  in  its  effects  as  to  give  manufacturers 
time  to  adjust  their  business  to  the  change. 

Although  the  political  necessity  of  a  settlement  along  lines 
of  concession  was  generally  recognized,  the  measure  was  not 
easily  passed.  New  England  and  the  Middle  States  were 
committed  too  far  to  protection  to  be  willing  to  yield,  and  the 
West  divided  about  evenly.  By  sections  the  vote  in  the  House 
was  as  follows  :  — 


8z]    Nullification;   Compromise  Tariff.    187 


In  favor 

Opposed 

New  England  .    .     . 
Middle  Stales  .     .    . 

South  and  Southwest 

10 
24 
10 
75 

28 

47 
8 

2 

Total 

119 

85 

The  act  provided  for  a  general  reduction  of  all  duties  ex- 
ceeding 20  per  cent.;  between  1834  and  1842  duties  were 
to  be  reduced  by  a  biennial  excision  of  one-tenth  per  cent, 
of  the  excess  percentage  above  20  per  cent. ;  and  then 
in  January  and  July,  1842,  the  remaining  excess  was  to  be 
struck  off.  The  law  also  enlarged  the  free  list ;  but  on  the 
other  hand  the  tariff  party  by  strenuous  insistence  provided 
for  home  valuation  of  goods  imported  after  1842,  and  secured 
the  abolition  after  1842  of  the  credit  system  for  payment  of 
duties. 

Clay's  motives  in  fathering  the  act  of  1833  are  complex  and 
perhaps  not  wholly  consistent;  perhaps  he  realized  that  the 
opposition  majority  in  the  next  Congress  would  probably  over- 
throw the  protective  system,  and  that  if  there  were  to  be  a 
change  it  should  be  gradual  instead  of  summary  in  its  action, 
and  consequently  less  injurious  to  capital  which  had  been 
recently  invested.  He  probably  wished  to  prevent  a  serious 
break  with  South  Carolina,  which  might  give  Jackson  an  op- 
portunity to  wield  military  power.  Perhaps  also,  as  has  been 
suggested,  he  had  no  expectation  that  the  uniform  20  per 
cent,  rate  would  ever  go  into  effect. 

The  position  of  other  statesmen  on  this  measure  is  deserv- 
ing of  passing  comment.  Webster  strictly  opposed  this  tariff, 
holding  that '  the  essence  of  the  protective  principle  lay  in 
discrimination  between  various  classes  of  imports  which  would 
be  made  inoperative  by  accepting  a  horizontal  regulation. 
Again,  Webster  held  that  it  was  not  only  unwise  but  uncon- 
stitutional for  Congress  to  bind  itself  for  a  term  of  years ;  but, 


i  88        Tariff  Legislation,  i  818-1833.       [§  8z 

more  than  all,  he  was  controlled  by  his  hostility  to  the  States- 
rights  philosophy.  He  would  not  yield  to  the  South  while 
nullification  was  rampant;  any  compromise  seemed  to  him 
a  reflection  upon  the  true  constitutional  principles  of  unity 
and  sovereignty  which  he  so  valiantly  upheld.  To  Calhoun 
the  measure  was  acceptable,  partly  because  he  was  persuaded 
of  the  futility  of  longer  carrying  on  the  struggle  against  Jack- 
son, and  partly  because  the  bill  contained  at  bottom  the 
principle  for  which  the  South  was  contending. 

The  tariff  of  1833  is  of  particular  interest  since  it  contem- 
plated a  gradual  reduction  of  duties  which  might  give  time 
to  the  capital  and  labor  of  the  country  to  adjust  themselves 
to  the  change ;  even  the  first  modification  was  not  to  go  into 
effect  until  nine  months  after  the  passage  of  the  act.  Fiscal 
experts,  however,  have  generally  been  sceptical  over  horizontal 
reductions  of  tariff  duties,  inasmuch  as  it  is  impossible  to 
foresee  what  will  be  the  incidence  of  taxation  when  rates  are 
cut  uniformly  on  commodities  varying  in  their  supply  and  use. 
A  30  per  cent,  rate,  for  example,  may  be  prohibitory  ;  while 
a  reduction  to  a  20  per  cent,  rate  may  allow  foreign  goods  to 
compete  freely  with  the  domestic  product.  It  is  difficult  to 
estimate  the  merits  of  the  compromise  tariff  act  as  a  producer 
of  revenue,  since  it  never  went-  into  complete  effect.  The 
disturbances  to  commerce,  banking,  and  general  business 
extending  from  1834  to  1838  were  so  violent  and  due  to  so 
many  causes  that  it  is  impossible  to  disentangle  the  influence 
of  the  tariff. 

The  compromise  tariff  has  one  unique  interest  in  legisla- 
tion because  it  is  one  of  the  few  measures  designed  to  limit 
the  freedom  of  future  Congresses  over  the  revenue.  The 
act  was  repeatedly  referred  to  as  an  inviolable  promise,  and 
Calhoun  for  example  maintained  this  so  earnestly  that  he 
was  unwilling  later  to  abolish  the  admittedly  unequal  and 
odious  salt  tax,  for  fear  that  any  change  whatever  would 
in  the  future  give  the  manufacturing  interests  an  excuse  to 
reopen  the  whole  tariff  controversy.     The   average    rates   of 


83] 


Customs  Administration. 


189 


duty  on  dutiable  goods  beginning  with  182 1,  the  first  year  in 
which  statistics  permit  such  comparison,  were  as  follows:  — 


Year 

Per  cent. 

Year 

Per  cent. 

1821 

35-6 

1832 

33-82 

1822 

3i-7 

•833 

3'  93 

1823 

32-7 

'834 

32.6 

1824 

37-S1 

183s 

360 

1825 

37-i 

1836 

31.6 

1826 

346 

1837 

25-3 

1827 

4'-3 

1838 

37-8 

1828 

39-  3 ' 

"839 

29.9 

1829 

44-3 

1840 

304 

1830 

488 

1841 

32.2 

183 1 

40.8 

1842 

23-1 

1  Tariff  increase. 


2  Tariff  revision. 


3  Compromise  tariff. 


83.  Problems  of  Customs  Administration. 

The  tariff  act  of  1833  planned  important  changes  in  the 
administrative  collection  of  customs  duties.  The  difficulty  in 
securing  a  fair  valuation  of  the  goods  imported  was  increasing 
year  by  year,  and  became  more  serious  as  soon  as  ad  valorem 
rates  instead  of  specific  duties  constituted  a  considerable  part 
of  the  tariff  schedules.  Before  1816  the  value  of  goods  was 
sworn  to  by  the  person  making  the  entry,  on  the  basis  of  an 
accompanying  invoice,  but  when  protection  was  accepted  in 
earnest  the  need  of  accurate  valuations  was  more  acutely 
felt;  authority  was  consequently  given  in  1818  to  the 
secretary  of  the  treasury  to  make  an  appraisement  of  the 
goods  in  case  there  were  a  suspicion  of  a  fraudulent  valuation. 
Dishonest  returns  might  be  effected  by  false  measurements  ; 
or  by  returning  the  average  for  the  actual  cost  of  goods  in  a 
mixed  package  ;  or  by  intentional  undervaluations.  Another 
irregularity,  not  necessaiily  dishonest,  came  from  consignments 
of  goods  by  foreign  manufacturers  to  agents  in  America  with 
invoices  based  upon  manufacturers'  costs  but  decidedly  lower 
than  the  valuation  placed  upon  similar  goods  purchased  by 
Americans  in  foreign  markets  ;  the  home  manufacturer  was  thus 
placed  at  a  disadvantage  as  compared  with  his  foreign  rival. 


190       Tariff  Legislation,  1818-1833.       [§83 

An  aggravated  form  of  this  practice  was  developed  in  the 
so-called  auction  system,  by  means  of  which  the  surplus  hold- 
ings of  English  manufacturers  accumulated  during  the  long 
war  with  France  were  consigned  and  dumped  on  the  American 
market  at  ruinous  prices.  This  system  not  only  led  to  State 
legislation  for  the  control  and  even  suppression  of  auctions, 
but  had  much  to  do  with  intensifying  the  protective  sentiment 
of  that  period.  In  the  hope  of  reducing  these  evils  a  law  was 
therefore  enacted  in  1823  substituting  for  the  words  "actual 
cost,"  in  the  oath  required  of  the  importer,  the  phrase  "just 
and  true  valuation  of  the  goods  at  their  fair  market  value  "  ; 
this  change  did  not  remove  reasons  for  complaint,  and  later 
the  discretionary  power  of  the  treasury  department  in  ordering 
an  appraisement  was  made  mandatory  in  all  cases  where  ad 
valorem  rates  were  levied. 

A  further  mark  of  dissatisfaction  is  the  provision  in  the 
compromise  tariff  of  1833  that  a  home  valuation  of  goods 
imported  be  adopted  after  June  30,  1842.  The  clause  was 
inserted  in  order  to  include  freight  as  a  part  of  the  cost,  and 
thus  to  increase  the  protection.  Owing  to  political  changes 
caused  later  by  Tyler's  erratic  administration,  the  principle 
was  not  given  a  trial,  and  later  during  the  free-trade  period 
inaugurated  in  1846  it  was  so  sharply  criticised  that  the 
proposition  was  allowed  to  drop.  The  chief  objection  made 
to  home  valuation  was  that  it  would  inevitably  cause  differ- 
ent valuations  of  the  same  goods  at  different  ports,  thus  vio- 
lating the  spirit  and  the  letter  of  the  Constitution,  which 
declares  that  "all  duties,  imposts,  and  excises  shall  be  uni- 
form throughout  the  United  States,"  and  that  "no  prefer- 
ence shall  be  given  by  any  regulation  of  commerce  or  revenue 
to  the  ports  of  one  State  over  those  of  another."  With  less 
reason  it  was  held  that  the  practice  would  give  special  oppor- 
tunities for  fraud,  since  importers  by  fictitious  or  speculative 
transactions  might  control  the  market  value  at  their  respective 
ports,  and  thus  fix  the  basis  of  the  duties  to  be  paid. 

Another   and  a  permanent   change    incorporated  into    the 


§  84]         Analysis  of  Tariff  Reasoning.  1 9 1 

compromise  tariff  was  the  abolition  of  credits  to  importers. 
The  losses  to  the  government  under  the  generous  system  of 
granting  credits  secured  by  bonds  had  been  less  than  might 
have  been  expected;  of  $781,000,000  secured  in  duties  in 
the  period,  1 789-1 830,  the  loss  was  less  than  $6,000,000. 
Nevertheless  there  was  possibility  of  large  loss ;  and  it  was 
unbusiness-like  and  inconsistent  with  sound  administration  for 
the  government  indirectly  to  loan  capital  to  a  particular  mer- 
cantile interest.  A  still  more  serious  defect  from  a  ■  fiscal 
point  of  view  was  that  the  credit  system  interfered  with  a 
proper  adjustment  of  expenditures  to  revenue;  it  made  it 
well-nigh  impossible  to  estimate  with  any  degree  of  prompti- 
tude the  effect  of  a  new  tariff  or  to  take  immediate  advantage 
of  a  commercial  revival  and  increased  imports.  After  1842, 
therefore,  credits  were  abolished,  and  the  change  to  cash  pay- 
ments was  intended  somewhat  to  stiffen  the  protective  system 
and  to  compensate  for  the  lower  rates  which  the  compromise 
tariff  of  1833  prescribed  after  1842. 

84.    Analysis  of  Tariff  Reasoning. 

From  the  enactment  of  the  compromise  act  of  1833  until 
1 86 1  the  only  warm  contest  over  the  tariff  was  that  in  1846. 
Before  leaving  the  subject  it  is  worth  while  briefly  to  state 
some  of  the  arguments  which  had  been  developed  in  favor 
and  in  opposition  to  protection  of  industry  by  the  government. 
In  the  early  debates  on  this  subject  what  may  be  termed  the 
"  national  independence  "  argument  was  a  favorite  and  was 
forcibly  used  in  popular  appeals  to  patriotic  constituents. 
It  was  held  disgraceful  that  the  United  States  should  depend 
upon  foreign  nations  for  any  articles  of  consumption ;  that 
independence  in  industry  must  go  hand  in  hand  with  inde- 
pendence in  political  life.  Europe  in  those  days  was  much 
farther  off  than  it  is  to-day ;  and  the  inconvenience  of  obtain- 
ing supplies  was  incomparably  greater  than  at  the  present  time. 
Even  Hamilton  was  somewhat  influenced  by  the  argument ; 
President  Washington  set  it  forth  in  his  inaugural  address  in 


192        Tariff  Legislation,  1818-1833.       [§84 

1 789,  when  he  advised  his  countrymen  "  to  promote  such 
manufactures  as  tend  to  render  them  independent  of  others 
for  essentials,  particularly  military  supplies,"  and  again  more 
definitely  in  the  annual  address  in  1 796  ;  even  if  commodi- 
ties should  by  a  tariff  cost  more  in  time  of  peace,  the  security 
and  independence  thence  arising  would  prove  an  ample  com- 
pensation. Succeeding  presidents  referred  to  this  advantage 
with  equal  approbation,  as  for  example  Madison  in  the  annual 
messages  of  1810  and  181 5  and  Monroe  in  those  of  1817  and 
1823  ;  while  Clay  in  1820  endeavored  to  attract  support  for 
the  American  system  by  contemptuously  referring  to  the 
United  States  as  an  English  colony  of  commercial  slaves. 

The  argument  for  the  creation  of  a  home  market  to  con- 
sume the  surplus  products  of  the  farmers  was  early  advanced, 
as  by  Hamilton  in  his  great  report  on  manufactures ;  and 
later  by  President  Madison  in  18 15  and  President  Monroe  in 
181 7.  Mathew  Carey  by  practical  illustration  pointed  out 
the  great  advantages  which  agriculture  had  derived  from  the 
vicinity  of  manufactures  at  Harmony,  Providence,  and  Pitts- 
burgh. Finally  the  argument  was  presented  in  a  more  precise 
form:  when  the  peace  of  1815  changed  the  course  of  trade 
it  was  urged  that  Europe  could  no  longer  consume  the  surplus 
agricultural  produce  of  the  United  States,  for  the  American 
powers  of  production  were  increasing  in  a  ratio  four  times 
greater  than  the  foreign  power  of  consumption  ;  and,  even  if 
foreign  nations  could  consume  the  surplus  products  of  the 
United  States,  they  would  prefer  adherence  to  their  own  re- 
strictive laws ;  therefore  the  United  States  must  create  a 
home  market.  Even  Jackson  preached  this  doctrine  :  "  Draw 
from  agriculture  the  superabundant  labor ;  employ  it  in 
mechanism  and  manufactures,  —  thereby  creating  a  home 
market  for  your  breadstuff's  and  distributing  labor  to  the  most 
profitable  account  and  benefit  to  the  country." 

Of  later  growth  was  the  argument  that  a  protective  tariff 
cheapens  prices.  Hamilton  considered  this  argument,  and 
admitted  that  the  immediate  effect  of  protective  duties  may 


§84]         Analysis  of  Tariff  Reasoning.  193 

be  an  increase  in  price,  but  "it  is  universally  true  that  the 
contrary  is  the  ultimate  effect  with  every  successful  manu- 
facture." The  argument,  however,  was  never  made  promi- 
nent until  a  quarter  of  a  century  later.  Matthew  Carey,  in 
1824,  asserted  that  the  United  States  saved  more  in  one  year 
in  the  cheapness  and  quality  of  commodities,  particularly  of 
cotton  goods,  than  was  lost  in  the  time  spent  in  maturing 
their  manufactures.  Similar  ideas  were  expressed  by  Presi- 
dent John  Quincy  Adams  in  his  annual  message  in  1828,  and 
the  argument  was  especially  developed  by  the  "  Friends  of 
Domestic  Industry"  in  their  statement  of  1831  :  on  some 
commodities,  to  be  sure,  the  prices  had  been  increased,  but 
by  no  means  to  the  extent  of  the  duty,  and  on  many  articles 
of  domestic  use  the  tariff  had  reduced  prices  to  the  foreign 
standard.  Clay  placed  great  stress  upon  this  consideration, 
claiming  that  the  tariff  of  1824  had  lessened  the  price  of 
protected  commodities,  and  putting  forth  the  doctrine  that 
"the  duty  never  becomes  an  integral  part  of  the  price,  except 
in  the  instances  where  the  demand  and  supply  remain  after 
the  duty  is  imposed  practically  what  they  were  before,  or 
the  demand  is  increased  and  the  supply  remains  stationary."  1 
The  advocates  of  free  trade  on  their  part  met  this  argument 
with  the  assertion  that  prices  were  naturally  falling,  owing  to 
the  introduction  of  labor-saving  machinery,  and  attention  was 
directed  to  the  fact  that  raw  materials  entering  into  manu- 
factures were  falling  in  price  while  gold  and  silver  were 
appreciating  in  value. 

The  protectionists  also  laid  stress  upon  the  protective  sys- 
tems of  Europe  and  asserted  that  the  United  States  must  be 
governed  by  the  policy  of  foreign  competing  nations.  Clay 
emphatically  insisted  in  1820,  in  1824,  and  in  1832  that  the 
question  of  protectionism  must  be  decided  in  the  face  of  the 
fact  that  European  nations  maintained  restrictive  systems. 
"  I  too,  am  a  friend  to  free  trade,  but  it  must  be  free  trade 
of  perfect  reciprocity."     The  maxim  of  free  trade  is  "  truth 

1    Works,  vol.  ii,  p   401.     Colton's  Lift,  vol.  ii,  p.  240. 
'3 


194       Tariff  Legislation,  1818-1833.       [§84 

in  the  books  of  European  political  economy.  It  is  error  in 
the  practical  code  of  every  European  State."  In  1824  he 
declared  that  "  if  all  nations  would  modify  their  policy  axioms 
perhaps  it  would  be  better  for  the  common  good  of  the 
whole,"  and  again  in  1832  he  complained  that  other  nations 
would  not  break  down  their  bars. 

The  "  young  industries "  argument  was  also  made  much 
of;  in  the  earlier  development  of  the  protectionist  system  it 
was  not  supposed  that  the  policy  would  necessarily  be  perma- 
nent. "No  one,"  said  Clay  in  1840,  "in  the  commencement 
of  the  protective  policy,  ever  supposed  that  it  was  to  be  per- 
petual. We  hoped  and  believed  that  temporary  protection 
extended  to  our  infant  manufactures  would  bring  them  up,  and 
enable  them  to  withstand  competition  with  those  of  Europe." 
In  like  manner  at  a  later  period  Henry  C.  Carey,  who  did 
more  than  any  other  writer  clearly  to  formulate  the  protection- 
ist reasoning,  stated  that  restrictive  duties  were  but«a  means  to 
an  end ;  protection  was  needed  to  attain  ultimate  free  trade. 

At  first  the  arguments  against  the  protective  principle  were 
general  and  based  on  the  idea  that  manufacturing  industry 
was  not  so  innocent  an  occupation  as  agriculture.  It  was 
argued  that  labor  and  capital  would  be  forced  into  new  and 
reluctant  employments  for  which  this  country  lacked  skill  and 
ingenuity,  that  the  manufacturing  system  was  adverse  to  the 
genius  of  the  American  government  by  its  tendency  to  accu- 
mulation of  large  capital  and  corruption  of  public  morals.  In 
1822  John  Taylor  of  Virginia  published  "  Tyranny  Unmasked," 
devoted  to  the  argument  that  the  system  of  protective  duties 
would  end  in  tyranny  and  monarchy.  Somewhat  allied  to  this 
plea  was  the  contention  of  Calhoun,  who  in  the  oft-quoted 
speech  of  18 16  noted  that  the  most  serious  objection  which 
he  could  discover  in  manufactures  was  the  dependence  it 
caused  among  the  employed  ;  and  later  he  repeatedly  dwelt 
upon  the  bad  effect  upon  politics  and  morals  caused  by  the 
struggles  for  legislative  favor.  There  was  "  less  patriotism 
and  purity,  and  more  faction,  selfishness,  and  corruption." 


§84]        Analysis  of  Tariff  Reasoning.        195 

A  purely  economic  objection  was  that  advanced  by  Southern 
opponents  of  the  tariff,  beginning  with  about  1830,  in  the  de- 
velopment of  the  theory  that  import  duties  are  in  effect  direct 
taxes  upon  exports;  the  South  was  taught  that  a  protective 
tariff  was  a  system  of  taxation  practically  levied  upon  the  pro- 
ductions of  cotton,  rice,  and  tobacco,  which  formed  the  bulk 
of  the  exports.  This  theory  is  based  upon  the  principle  that 
exports  pay  for  the  imports,  and  that  consequently  whatever 
increases  the  price  of  imported  articles  must  increase  the 
amount  of  exports  needed  to  pay  for  a  given  quantity  of 
goods.  The  consideration  of  this  argument  in  its  various 
refinements  cannot  be  undertaken  here,  its  chief  interest  in 
this  connection  lying  in  the  fact  that  the  general  political 
reasoning  of  the  South  in  regard  to  the  powers  of  the  federal 
government  was  in  this  case  reinforced  by  economic  logic  of 
a  convincing  character. 

A  standing  objection  to  the  protective  system  was  its  un- 
constitutionality. After  the  adoption  of  the  first  tariff  in  1789 
it  was  not  much  urged  until  1820;  but  after  that  date,  with 
growing  sectionalism  developed  by  the  slavery  question,  with 
suspicions  aroused  by  the  successive  federalizing  decisions  of 
the  Supreme  Court,  and  provoked  by  the  definite  propaganda 
of  the  American  system  by  Clay  and  John  Quincy  Adams,  the 
constitutional  objection  was  dwelt  upon  at  length ;  it  appears 
freely  in  the  tariff  discussion  of  1824,  and  in  1828  the  anti- 
tariff  men  tried  to  secure  a  definite  issue  to  bring  before  the 
courts  by  incorporating  into  the  tariff  act  of  that  year  the 
preamble  of  the  act  of  1 789,  which  declared  without  equivo- 
cation that  the  protection  of  domestic  manufactures  was  one 
of  the  purposes  of  the  act.  The  high-tariff  party,  however, 
would  not  admit  the  amendment,  and  the  nullifiers  afterwards 
claimed  that  the  opponents  of  protection  had  denied  the 
opportunity  of  an  obvious  and  adequate  legal  remedy  through 
the  courts.  In  the  same  spirit  Professor  Sumner  writes 
that  Congress  "  had  unquestioned  power  to  lay  taxes.  How 
could  it  be  ascertained  what  the  purpose  of  the  majority  of 


196        Tariff  Legislation,  1818-1833.       [§84 

Congress  was,  when  they  voted  for  a  certain  tax  law?  How 
could  the  constitutionality  of  a  law  be  tried  when  it  turned  on 
the  question  of  this  purpose,  which  in  the  nature  of  the  case 
was  mixed  and  unavowed."  *  In  183 1  an  attempt  was  made  in 
South  Carolina  to  test  the  constitutionality  of  the  tariff  in  the 
courts  by  refusing  to  satisfy  bonds  which  had  been  given  to 
secure  duties,  and  by  entering  a  plea  of  "  no  consideration  " 
for  the  taxes  levied.  The  United  States  District  Court,  how- 
ever, declined  to  hear  evidence  upon  this  plea.2 

Madison,  so  often  called  the  father  of  the  Constitution,  in 
a  letter  of  1827  to  Mr.  Cabell  of  Virginia  expressed  a  "con- 
fident opinion  "  of  the  full  power  of  Congress  to  protect  man- 
ufactures ;  the  phrase  "  to  regulate  trade  "  he  understood  to 
include  the  power  to  encourage  manufactures,  because  that 
had  been  the  use  of  the  phrase  among  all  nations,  and  partic- 
ularly in  Great  Britain,  "  whose  commercial  vocabulary  is  the 
parent  of  our  own  "  ;  such  was  the  use  made  of  the  power  to 
regulate  taxes  by  the  States  so  long  as  they  retained  power 
over  foreign  trade  ;  in  giving  the  general  regulation  of  com- 
merce to  the  federal  government  the  people  supposed  that 
they  were  giving  authority  to  protect  their  own  industry ;  and 
the  exercise  of  that  power  by  the  first  Congress  seemed  to 
Madison  conclusive  evidence  that  they  believed  that  the  Con- 
stitution granted  it. 

1  Sumner,  Jackson,  p.  285. 

2  Ibid,  p,  220. 


CHAPTER   IX. 

ATTACK   UPON  THE   BANK;   THE   SURPLUS. 

1829-1837. 

85.  References. 

Bibliographies:  Bogart  and  Rawles,  33-37;  Channing  and  Hart, 
374-375;  A.  B.  Hart,  Handbook  of  History,  Diplomacy,  and  Government, 
160-162  (internal  improvements). 

Bank  :  (i)  Sources,  Messages  and  Papers,  II,  462  ( 1829) ;  529  (1830), 
576-591  (veto,  July  10,  1832);  Clarke  and  Hall,  Documentary  History  of 
Bank,  735-777  (report  of  committee,  1830);  T.  H.  Benton,  Thirty  Years, 
I,  chs.  56,  60,  63-68,  72,  75,  77  ;  W.  MacDonald,  Select  Documents,  261- 
26S(veto) ;  A.Gallatin,  Writings,  III,  328-346;  Documents,  etc., in  Ameri- 
can History  Leaflets,  No.  24  (Nov.,  1825).  (ii)  SPECIAL:  R.  C.  H.  Cat- 
terall,  Second  Bank  of  the  U.  S.,  164-313;  W.  G.  Sumner,  History  of 
Banking,  183-224;  W.  G.  Sumner,  Jackson,  235-249,  259-276.  291-296, 
337-342;  ISolles,  II,  334-338  ;  H.  White,  281-313,  or  in  Sound  Currency, 
IV,  No.  18  ;  R.  S.  Long,  Andrew  Jackson  and  the  National  Bank,  in  Eng. 
Hist.  Review,  XII,  85-89;  C.  A.  Conant,  History  of  Modem  Banking, 
302-309;  J.  J.  Knox,  History  of  Banking,  62-79.  (iii)  General:  C. 
Schurz,  Clay,  I,  351-378;  H.  von  Hoist,  Constitutional  History  of  the 
U.  S.,  II,  31-52;  T.  Roosevelt,  Benton,  1 14-142. 

Removal  ok  Deposits:  (i)  Sources,  Messages  and  Papers,  III,  5-19 
(cabinet  paper,  Sept.  18,  1833);  Finance  Reports,  III,  337  (Taney  on  re- 
moval of  deposits),  451  (report,  April  15,  1834)  ;  602  (list  of  depositories)  ; 
Benton 's  Abridgment,  XII,  191  et  seq. ;  W.  MacDonald,  Select  Documents, 
289-295  (cabinet  paper),  295-303,  317-323  (see  bibliographical  note)  ; 
Statutes,  V,  52  (regulation  of  deposits) ;  D.  Webster,  Works,  IV ;  T.  H. 
Benton,  Thirty  Years,  chs.  92-101.  (ii)  Special  :  J.  B.  Phillips,  Methods 
of  Keeping  the  Public  Money,  in  Pub.  Michigan  Pol.  Sci.  Assn.  (Dec,  1900), 
49-66  (references  to  public  documents) ;  Bolles,  II,  334-339.  (iii)  Gen- 
eral: J.  Parton,  Jackson,  III,  499-536  ;  H-  von  Hoist,  History  of  U.  S., 
H>  53_7°;   W.  G.  Sumner,  Jackson,  296-321  ;  C.  Schurz,  Clay,  II,  23-51. 

Coinage:  Statutes,  IV,  699;  V,  136;  or  Dunbar,  234-236;  Report  of 
Monetary  Commission,  497  (Act  of  1834);  T.  H.  Benton,  Thirty  Years, 
I,  chs.  105,  108;  D.  K.  Watson,  History  of  Coinage,  78-115;  J.  L.  Laugh- 
lin.  History  of  Bimetallism,  52-74. 

Internal  Improvements:  Sources,  Messages  and  Papers,  I,  410, 
418  (Jefferson),  584  (veto  of  Madison,  1817)  ;  II,  142  (veto  of  Monroe, 
1822),  483-493   (Maysville  veto,   1830),    508,  683;    III,  118-123;  also 

197 


198  Attack  upon  the  Bank.  [§  86 

index,  "  Internal  Improvements  "  in  vol.  X. ;  American  State  Papers, 
Miscellaneous,  I,  724  (Gallatin's  report,  April  12, 1808),  910-916  ;  H.  Clay, 
Speeches,  II;  Benton,  Thirty  Years,  I,  21-27  (1824),  167  (Maysville  veto). 
General:  H.  von  Hoist,  Constitutional  History  of  U.  S.,  I,  388-396;  H. 
Adams,  Life  of  Gallatin,  350-352  (also  index) ;  J.  A.  Stevens,  Gallatin, 
298-301 ;  C.  Schurz,  Clay,  I,  40-47  (1806);  D.  C.  Gilman,  Monroe,  239- 
248;  W.  G.  Sumner,  Jackson,  191-194. 

Land:  (i)  Sources,  Messages  and  Papers,  II,  305  (1825),  391  (1827), 
600  (1832);  Finance  Reports,  II,  175,  492  (1820);  also  index,  "Public 
Lands,"  vols.  I,  II,  III ;  A.  Seybert,  Statistical  Annals,  306-308  (statistics, 
1817);  T.  H.  Benton,  Thirty  Years,  I,  II  (1821),  102-107;  A.  Gallatin, 
Writings,  I,  297.  (ii)  SPECIAL  :  A.  B.  Hart,  Disposition  of  our  Public  Lands, 
in  Quar.  Jour.  Econ.,1,  169-183,  251-254;  C.  F.  Emerick,  Government 
Loans  to  Farmers,  in  Pol.  Sci.  Quar.,  XIV,  444;  S.  Sato,  History  of  the 
Land  Question,  in  J.  H.  U.  Studies,  IV  (1886),  121-158;  Bolles,  II,  545; 
H.  Adams,  Finance,  255-260.  (iii)  General  :  W.  G.  Sumner,  Jackson, 
184-191 ;  J.  A.  Stevens,  Gallatin,  245-248. 

Surplus  and  Distribution:  (i)  Sources,  Messages  and  Papers,  II, 
451  (1829),  514  (1830) ;  III,  56-69  (veto,  Dec.  4,  1833),  239-246  (1836), 
260  (table)  ;  Finance  Reports,  III,  228  (1831),  476  (1834),  643-646  (1835), 
686-690  (1836);  Statutes,  V,  55;  or  Dunbar,  115;  T.  H.  Benton,  Thirty 
Years,  I,  275-279,  362-368,  556-568,  649-658,  702-712;  Benton's  Abridg- 
ment, XI,  446,  492  et  seq. ;  XII,  24,  124;  H.  Clay,  Speeches,  II;  D. 
Webster,  Works,  IV.  (ii)  Special:  E.  G.  Bourne,  History  of  the  Surplus 
Revenue  of  1837,  pp.  169  (bibliography).  J.  J.  Knox,  U.  S.  Notes,  167- 
182,  190-192  ;  Bolles,  II,  547.  (iii)  General  :  C.  Schurz,  Clay,  II,  118- 
123;  W.  G.  Sumner,  Jackson,  325-331  ;  T.  Roosevelt,  Benton,  143-156. 

86.   Criticism  of  the  Bank. 

In  the  two  preceding  chapters  certain  phases  of  fiscal 
experience  extending  through  Jackson's  first  presidential 
term  have  been  considered,  as  for  example  the  state  of  the 
budget  and  the  development  of  the  tariff.  The  evolution  of 
these  branches  of  administration  was  but  little  disturbed  by 
the  change  from  President  Adams  to  President  Jackson  ;  the 
fate  of  other  financial  subjects  of  importance,  as  for  example 
the  control  of  government  funds,  was,  however,  profoundly 
affected  at  once  by  Jackson's  accession  to  power,  so  that  it  is 
necessary  to  return  to  the  beginning  of  his  term  of  office. 
Brief  mention  should  be  made  of  Jackson's  secretaries.  His 
first  secretary  of  the  treasury  was  S.  D.  Ingham  of  Pennsyl- 
vania, a  manufacturer  and  a  member  of  the  House  of  Rep- 


§  86]  Criticism  of  the  Bank.  1 99 

resentatives  for  many  years ;  he  was  a  devoted  worker 
for  Jackson,  not  above  taking  part  in  the  "  bargain  and  cor- 
ruption "  cry  against  Clay.  Ingham's  qualifications  for  the 
treasury  are  not  apparent,  but  Jackson  did  not  demand  a 
high  standard.  Ingham  fell  from  grace  in  the  famous  Mrs. 
Eaton  affair,  and  retired  in  April,  1831.  For  some  months 
the  department  was  without  a  secretary.  On  August  8,  1831, 
Louis  McLane  of  Delaware  was  appointed ;  he  was  a  man  of 
ability  who  had  achieved  distinction  in  diplomacy  at  London  ; 
he  was  inclined  toward  federalism  and  had  supported  the 
bank ;  and  while  secretary  he  assisted  in  the  preparation  of 
the  tariff  bill  known  as  the  Verplanck  measure.  Opposed  to 
the  removal  of  the  deposits  from  the  custody  of  the  United 
States  Bank  he  was  transferred  to  the  department  of  state, 
May,  1833,  when  William  J.  Duane  took  his  place.  Duane, 
as  will  be  seen,  was  quickly  followed  by  Taney,  who  in  turn 
gave  way,  June  27,  1834,  to  Levi  Woodbury  of  New  Hamp- 
shire ;  the  latter  held  office  throughout  the  remainder  of 
Jackson's  administration  and  that  of  Van  Buren. 

Underneath  the  apparent  great  prosperity  of  the  bank  of 
the  United  States  there  were,  as  has  been  indicated,  forces 
ready  to  be  aroused  into  hostility.  The  conflict  between  the 
bank  and  some  of  the  States  in  their  effort  to  tax  branches  of 
the  bank  left  memories  which  boded  no  good ;  and  the  check 
which  the  bank  exercised  over  inflated  note  issues  of  local 
institutions,  while  recognized  as  one  of  the  fundamental 
reasons  for  the  establishment  of  the  bank  in  18 16,  made 
lasting  enemies.  There  was  still  a  deeper  agency  at  work 
which  led  to  the  final  overthrow  of  the  bank,  —  the  revival  of 
Jeffersonian  democracy,  which  was  displayed  in  many  interest- 
ing ways  about  the  year  1830:  monopolies  must  be  put  down 
and  it  was  held  high  time  for  a  return  to  the  simpler  principles 
of  the  fathers  of  political  democracy.  Into  the  various  mani- 
festations of  this  movement  it  is  impossible  here  to  enter,  but 
this  phase  of  public  opinion  needs  to  be  reckoned  with,  in 
order  to  account  for  the  rapid  downfall  of  the  bank  which,  as 


200  Attack  upon  the  Bank.  [§  86 

a  financial  institution,  had  been  on  the  whole  wisely  managed 
since  1819. 

Open  hostility  to  the  bank,  as  first  disclosed  in  1829,  was 
apparently  prompted  by  local  intrigues  in  the  hope  of  making 
political  capital;  in  June,  1829,  Senator  Woodbury  of  New 
Hampshire  brought  complaints  against  Jeremiah  Mason, 
manager  of  the  Portsmouth  branch,  alleging  that  Mason  was 
not  altogether  civil  in  his  manners,  and  was  partial  to  anti- 
Jackson  men  in  making  loans  and  collections.  It  is  doubtful 
if  this  incident  had  much  real  significance  ;  Jackson's  election 
was  really  due  to  the  rising  tide  of  democracy  and  especially 
the  democracy  of  the  West  and  pioneer  settlements ;  and  his 
position  towards  the  bank  was  indicated  in  his  first  message 
to  Congress,  December,  1829,  in  which  he  affirmed  that  both 
the  constitutionality  and  the  expediency  of  the  law  creating 
the  bank  were  questionable,  and  accused  the  bank  of  not 
establishing  a  uniform  and  sound  currency.  In  its  place  he 
would  have  a  bank,  as  a  branch  of  the  treasury  department, 
based  upon  public  and  private  deposits  without  power  to  make 
loans  or  to  purchase  property.  A  bank  of  this  character 
would  not  be  able  to  operate  on  the  hopes,  fears,  or  interests 
of  large  masses  of  the  community,  and  would  thus  be  shorn 
of  the  influence  which  made  the  present  bank  formidable. 

The  president's  reference  to  the  bank  was  made  the  basis 
of  inquiry  in  both  Houses  of  Congress.  The  House  Committee 
in  its  report  of  April  13,  1830,  favorably  discussed  the  bank 
from  three  points  of  view  :  first,  its  constitutionality ;  second, 
its  expediency ;  and,  third,  —  in  accordance  with  the  vague 
suggestion  made  by  Jackson  in  his  message,  —  the  wisdom  of 
founding  a  different  institution  upon  the  credit  and  revenues 
of  the  government.  The  argument  in  favor  of  the  expediency 
of  the  bank  was  practically  a  currency  argument ;  it  set  forth 
that  the  dispute  was  not  between  an  issue  of  paper  currency 
and  metallic  currency,  but  between  a  national  paper  currency 
and  a  local  paper  currency.  Since  Congress  had  no  constitu- 
tional power  to   forbid  the  issue  of  paper  money  by  State 


§87]     Unsuccessful  Effort  to  Recharter.      201 

banks,  local  bank-notes  would  circulate,  and  it  was  not  worth 
while  to  discuss  the  superior  advantages  of  a  specie  currency. 
The  question  therefore  arose :  Is  it  not  better  to  have  a 
staple  currency  which  by  virtue  of  its  uniformity  of  value  will 
prevent  local  bank-notes  from  circulating  far  from  the  place 
of  issue  ?  And  the  committee  was  convinced  that  the  United 
States  Bank  by  its  notes  did  actually  furnish  such  a  circulating 
medium,  more  satisfactory  even  than  specie.  If  the  current 
medium  were  confined  to  specie,  a  planter  in  Louisiana  who 
wished  to  purchase  merchandise  in  Philadelphia  would  be 
obliged  to  pay  1  per  cent,  for  a  bill  of  exchange  on  Louisi- 
ana, covering  the  transportation  and  insurance  of  the  specie,  — 
an  expense  of  which  one-half  was  saved  through  the  issue  of 
drafts.  Again,  the  bank  was  shown  to  have  performed  with 
most  scrupulous  punctuality  its  stipulation  to  transfer  free  of 
expense  the  funds  of  the  government  to  any  point  where  they 
might  be  wanted. 

The  committee  had  no  sympathy  with  a  bank  resting  on  the 
credit  and  revenues  of  the  government  as  suggested  by  Jack- 
son ;  only  the  discretion  and  prudence  of  the  government  could 
then  be  relied  upon  to  limit  excessive  issues  of  bills,  and  this 
frail  dependence  would  not  prevent  inflated  issues  comparable 
to  the  paper  money  of  the  Revolution.  Such  a  fiscal  insti- 
tution would  surely  get  into  politics ;  it  would  lead  to  a 
corrupt  use  of  political  patronage ;  all  holders  of  government 
notes  would  be  government  debtors  ;  political  parties  would 
be  divided  upon  the  question  of  adopting  a  strict  or  a  liberal 
policy  toward  these  debtors  ;  and  there  would  be  every  tempta- 
tion to  rely  upon  issues  of  the  bank  rather  than  upon  taxation 
to  supply  the  government  treasury.  The  Senate  report  was 
equally  favorable  to  the  bank,  and  bank  stock,  which  had 
fallen  from   125   to   116,  rose  to   130. 

87.   Unsuccessful  Effort  to  Recharter. 

The  real  war  upon  the  bank  was  yet  to  begin.  In  1831 
Senator  Benton  introduced  a  resolution  against    rechartering 


202  Attack  upon  the  Bank.  [§  87 

the  bank.  He  took  logical  and  effective  ground  by  demand- 
ing the  use  of  gold  currency  in  place  of  bank-notes,  and  his 
steady  attack  along  this  line  year  after  year  gained  for  him  the 
title  of  "  Old  Bullion."  His  denunciation  of  branch  drafts,  as 
expressed  in  a  speech  delivered  in  1832,  was  comprehensive  : 
the  currency  of  the  bank  was  not  signed  by  the  president  of  the 
bank ;  the  notes  were  not  issued  under  the  corporation  seal ; 
they  were  not  drawn  in  the  name  of  the  corporation ;  they 
were  not  subject  to  the  double  limitation  of  time  and  amount 
as  in  case  of  credit;  they  were  not  limited  to  the  minimum 
size  of  five  dollars ;  they  were  not  subject  to  the  supervision 
of  the  secretary  of  the  treasury ;  they  were  not  subject  to  the 
prohibition  against  suspending  specie  payment ;  they  were 
not  subject  to  the  penalty  of  double  interest  for  delayed  pay- 
ment ;  they  were  not  payable  at  the  place  where  issued ;  they 
were  not  payable  at  other  branches ;  they  were  transferable 
not  by  delivery  but  by  endorsement ;  they  were  not  receivable 
in  payment  of  public  dues ;  the  directors  were  not  liable  for 
excessive  issues,  and  finally  the  holder  had  no  right  to  sue 
at  the  branch  which  issued  the  order :  he  could  only  go  to 
Philadelphia  and  sue  the  director  there ;  a  right  about  equiva- 
lent to  the  privilege  of  going  to  Mecca  to  sue  the  successors 
of  Mahomet  for  the  bones  of  the  Prophet. 

Charges  of  this  character  were  too  academic  to  attract  much 
popular  attention,  but  Jackson's  pertinacity  and  downright 
positiveness  that  the  bank  was  unsound  made  an  impression 
upon  the  politicians  and  the  people.  The  unseasonable  activ- 
ity of  the  bank  in  its  own  behalf  in  every  possible  direction, 
in  the  press,  in  pamphlets,  and  in  political  campaigns,  also 
aroused  suspicion  as  to  whether  it  might  not  be  well  for  the 
people  to  bestir  themselves  and  at  least  to  inquire  into  the 
question.  In  January,  1832,  a  petition  for  recharter  was  in- 
troduced in  Congress  and  was  favorably  reported  upon  by 
committees  in  the  Senate  and  in  the  House.  The  opponents 
of  the  Bank  promptly  attempted  to  counteract  any  favorable 
impression  which  this  endorsement  might  give  by  securing  once 


§88]  Removal  of  the  Deposits.  203 

more  the  appointment  in  the  House  of  a  special  committee 
to  investigate  the  bank.  Three  reports  were  the  result : 
though  the  majority  was  now  adverse,  accusing  the  bank  of 
practising  usury,  of  the  issue  of  branch  drafts,  of  making  gifts 
to  roads  and  canals,  and  of  building  houses  to  rent  or  sell, 
most  of  the  charges  were  regarded  by  the  House  as  inconse- 
quential, and  the  bill  for  rechartering  was  passed,  receiving,  as 
might  have  been  expected,  the  veto  of  the  president  (July  10, 
1832).  Jackson's  message  presented  with  force  and  earnest 
conviction  the  dangers  of  a  money  monopoly  :  "  Is  there  no 
danger  to  our  liberty  and  independence  in  a  bank  that  in  its 
nature  has  so  little  to  bind  it  to  our  country?  The  president 
of  the  bank  has  told  us  that  most  of  the  State  banks  exist  by 
its  forbearance.  Should  its  influence  become  concentred, 
as  it  may  under  the  operation  of  such  an  act  as  this,  in  the 
hands  of  a  self-elected  directory,  whose  interests  are  identified 
with  those  of  the  foreign  stockholders,  will  there  not  be  cause 
to  tremble  for  the  purity  of  our  elections  in  peace,  and  for  the 
independence  of  our  country  in  war?"  If  it  were  wise,  he 
continued,  to  establish  such  a  monopoly,  the  government 
ought  to  receive  a  fair  equivalent ;  the  value  of  the  monopoly 
was  estimated  as  at  least  $17,000,000,  which  under  the  terms 
of  the  bill  it  was  proposed  to  barter  away  for  $3,000,000. 
Although  Congress  was  unable  to  pass  the  measure  over  the 
president's  veto,  it  rejected  Jackson's  other  recommendation 
made  a  few  months  later  that  the  government  should  sell  all 
its  bank  stock,  in  order  to  disconnect  itself  from  corporations 
and  all  business  pursuits  which  might  properly  be  regarded  as 
belonging  to  individuals. 

88.   Removal  of  the  Deposits. 

To  understand  the  next  incident  in  the  contest  between 
Jackson  and  the  bank  demands  a  reference  to  the  statutory 
relations  of  the  government  and  the  bank.  Section  16  of  the 
Bank  Act  of  18 16  provided  "that  the  deposits  of  the  money 
of  the  United  States  shall  be  made  in  said  bank  or  branches 


204  Attack  upon  the  Bank.  [§  88 

thereof,  unless  the  secretary  of  the  treasury  shall  at  any  time 
otherwise  order  and  direct ;  in  which  case  the  secretary  of  the 
treasury  shall  immediately  lay  before  Congress,  if  in  session, 
and  if  not,  immediately  after  the  commencement  of  the  next 
session,  the  reasons  of  such  order  or  direction."  In  accord- 
ance with  this  provision  most  of  the  funds  of  the  government 
had  been  deposited  with  the  bank,  and  until  Jackson  stirred 
up  trouble  no  one  had  suggested  a  different  policy.  The 
question  of  general  control  of  the  government  over  the 
bank  was  first  distinctly  raised  in  a  correspondence  in  1829 
between  Biddle  and  Ingham,  secretary  of  the  treasury,  who 
simply  reflected  Jackson's  views.  Biddle  met  the  criticism 
squarely ;  he  not  only  denied  the  power  of  the  secretary  of 
the  treasury  to  exercise  any  supervision  over  the  choice  of 
officers  of  the  bank  or  their  political  opinions,  but  he  also 
maintained  that  the  bank  was  responsible  only  to  Congress, 
and  was  carefully  shielded  by  its  charter  from  executive  con- 
trol. To  this  Ingham  replied  that  the  bank  was  organized 
for  national  purposes  and  for  the  common  benefit  of  all. 
Apparently  the  controversy  did  not  have  any  immediate  prac- 
tical significance,  and  for  the  time  being  this  phase  of  the 
subject  dropped  from  sight. 

In  December,  1832,  Jackson,  spurred  on  to  further  activity 
by  his  re-election,  which  he  properly  regarded  as  a  popular 
endorsement  of  his  position,  called  attention  to  certain  trans- 
actions of  the  bank  in  dealing  in  government  stock,  as  contrary 
to  its  charter,  and  suggested  that  possibly  the  funds  of  the 
government  were  not  safe,  and  that  at  least  an  investigation 
should  be  made.  Another  inquiry  was  thereupon  ordered ; 
not  only  did  the  majority  of  the  committee  on  ways  and 
means  report  that  the  funds  were  secure,  but  a  special  agent 
of  the  treasury  came  to  the  same  conclusion.  A  minority 
of  the  committee  sided  with  Jackson,  made  a  slighting  ref- 
erence to  some  of  the  assets  of  the  bank,  and  brought  to 
view  once  more  the  evil  practice  of  the  Western  branches  of 
the  bank  in  issuing  accommodation  bills.    The  House  adopted 


§  88]  Removal  of  the  Deposits.  205 

the  majority  report  on  March  2,  1833,  by  a  vote  of  109 
to  46. 

An  unfortunate  incident  for  the  bank  occurred  at  this  junct- 
ure :  the  treasury  drew  through  the  bank  for  nearly  a  million 
dollars  on  account  of  a  payment  due  from  France  under  the 
treaty  of  July  4,  1831  ;  the  French  treasury  for  political  rea- 
sons in  turn  protested  the  draft,  and  the  bank  was  involved  in 
a  troublesome  settlement  of  the  account.  To  Jackson  this 
was  another  proof  of  the  insolvency  of  the  bank,  and  when 
Biddle,  in  the  interest  of  maintaining  an  easy  money  market, 
advised  in  1832  against  the  immediate  paying  off  a  large  por- 
tion of  the  3  per  cent,  debt  largely  held  by  foreigners,  and 
agreed  to  continue  the  account  of  treasury  funds  which  was 
available  for  this  purpose  as  a  deposit  account  at  interest, 
Jackson  was  more  than  ever  convinced  that  the  bank  coun- 
selled delay  because  it  had  spent  the  government's  money. 
The  president's  remarks  are  thus  quoted  :  "  I  tell  you,  sir, 
she  's  broke.  Mr.  Biddle  is  a  proud  man  and  he  never  would 
have  come  on  to  Washington  to  ask  me  for  a  postponement  if 
the  bank  had  had  the  money.  Never,  sir.  The  bank 's 
broke,  and  Kiddle  knows  it."  The  president,  therefore,  was 
little  influenced  by  the  vote  of  confidence  in  the  bank  by  the 
House,  and  determined  at  all  hazards  to  break  off  all  relations 
between  the  bank  and  the  government. 

Before  Jackson  could  carry  out  his  plan  of  removal  of  the 
deposits  he  was  obliged  to  run  amuck  of  his  own  official  ad- 
visers. McLane,  who  succeeded  Ingham  as  secretary  of  the 
treasury,  objected  to  removal  except  under  authority  of  Con- 
gress, and  gave  way,  June  1,  1833,  to  William  J.  Duane. 
Duane  was  also  indisposed  to  act,  and,  though  earnestly  be- 
sought, refused  to  issue  the  order.  Jackson  persisted,  and  was 
fortunate  in  receiving  able  support  and  counsel  frcm  Taney, 
his  attorney-general.  Strengthened  by  the  argument  of  Taney, 
Jackson  in  a  cabinet  meeting  held  in  September,  1833,  justi- 
fied his  position  and  explained  at  length  his  theory  of  the  re- 
lations of  the  government  to  the  public  purse.     According  to 


206  Attack  upon  the  Bank.  [§  88 

the  president  the  duty  of  superintending  the  operation  of  the 
executive  departments  of  the  government  had  been  placed 
upon  him  by  the  Constitution  and  the  suffrages  of  the  Ameri- 
can people ;  he  was  responsible  for  the  performance  of  duty 
by  the  heads  of  departments ;  far  be  it  from  him,  however,  to 
expect  or  require  that  any  member  of  the  cabinet  should,  at  his 
request,  order,  or  dictation,  do  any  act  which  he  believed  un- 
lawful or  which  in  his  conscience  he  condemned.  The  presi- 
dent begged  his  cabinet  to  consider  the  proposed  measure  as 
his  own,  in  the  support  of  which  he  would  require  no  one  of 
them  to  make  a  sacrifice  of  opinion  or  principle.  A  measure 
so  important  to  the  American  people  could  not  be  commenced 
too  soon,  and  he  therefore  named  October  i  as  a  period 
proper  for  the  change  of  the  deposits,  or  sooner,  provided  the 
necessary  arrangements  with  the  State  banks  could  be  made. 
Duane's  obstinacy  increased ;  he  not  only  declined  to  issue 
the  required  order,  but  refused  to  resign.  He  was  therefore 
dismissed  September  23,  and  Taney,  who  had  been  the  author 
of  the  elaborate  paper  which  Jackson  had  presented  at  the 
cabinet  meeting  just  referred  to,  was  appointed  to  do  the 
deed.  Taney  loyally  accepted  the  responsibility,  and  on 
September  26  issued  the  order  directing  the  deposit  of  public 
moneys  henceforth  in  certain  State  banks.  Strictly  there  was 
no  direct  removal  of  funds  to  other  institutions,  —  the  amount 
on  deposit  with  the  bank  being  quickly  exhausted  through 
drafts  for  the  ordinary  expenditures  of  the  government. 

Jackson's  exposition  of  executive  powers  did  not  pass  un- 
challenged ;  the  opposition  urged  that  the  treasury  depart- 
ment was  an  executive  department  with  distinct  duties  from 
those  devolved  upon  the  president,  and  that  Congress  had 
designedly  given  a  separate  and  individual  power  to  the 
secretary  in  order  to  keep  asunder  the  purse  and  the  sword. 
More  specifically  it  was  argued  that  the  president's  powers 
in  regard  to  the  bank  were  limited  by  the  charter  of  the 
bank  to  two  :  the  appointment  of  the  government  directors, 
and  the  issuance  of  the  writ  scire  facias  whenever  he  believed 


§  88]  Removal  of  the  Deposits.  207 

the  charter  to  have  been  violated.  All  other  powers  by  the 
statute  of  181 6  were  delegated  to  others;  the  weekly  state- 
ments of  the  condition  of  the  bank  were  made  to  the  secre- 
tary of  the  treasury,  and  not  to  the  president;  and  if  any 
further  regulations  were  necessary  the  appointment  of  a  com- 
mittee of  investigation  could  be  authorized. 

Another  argument  was  that  no  money  could  be  drawn  from 
the  treasury  except  under  authority  of  appropriations  made 
by  law,  and  that  the  removal  of  the  deposits  without  con- 
gressional authority  contravened  this  clause.  In  reply  Benton 
argued  that  the  bank  charter  provided  that  the  bank  should 
give  the  necessary  facilities  for  transferring  public  funds.  The 
secretary  had  signed  transfer  drafts  to  the  amount  of  two 
millions  and  a  quarter ;  and  his  legal  right  to  withdraw  funds 
by  this  process  was  as  unquestionable  as  his  right  to  remove 
the  deposits  under  another  clause.  "  The  transfer  is  made  by 
draft"  said  Benton ;  ".a  payment  out  of  the  treasury  is  made 
upon  a  iv arrant ;  and  the  difference  between  a  transfer  draft 
and  a  treasury  warrant  was  a  thing  necessary  to  be  known  by 
every  man  who  aspired  to  the  office  of  illuminating  a  nation 
or  even  of  understanding  what  he  is  talking  about."  John 
Quincy  Adams,  then  in  Congress,  took  middle  ground,  assert- 
ing that  the  secretary  of  the  treasury  simply  had  power  to 
decide  whether  the  deposits  should  be  made  in  the  bank,  but 
that  when  once  made  he  could  not  withdraw  them  except  in 
accordance  with  appropriations  made  by  law ;  the  right  to 
withdraw  by  ordinary  payment  until  the  deposit  was  exhausted 
was  not,  however,  denied. 

Taney's  reasons  for  removal  were  stated  at  length  in  a 
document  presented  to  the  Senate,  December  3,  1833;  the 
weakness  of  this  argument  is  that  it  is  political  rather  than 
fiscal ;  he  said  that  the  charter  of  the  bank  was  to  expire 
in  1836,  and  as  there  were  strong  arguments  against  the 
wisdom  of  recharter,  and  the  people  in  the  presidential  elec- 
tion of  1832  had  endorsed  Jackson's  policy,  there  was  no 
reason  to  suppose  that  future  legislative  action  would  be  more 


208  Attack  upon  the  Bank.  [§  88 

favorable  to  the  bank ;  it  was  consequently  unwise  to  per- 
mit the  deposits  to  remain  until  the  close  of  the  corporate 
existence  of  the  bank.  The  funds  must  be  removed  some- 
time, and  in  view  of  the  bank's  determined  attitude  of  hos- 
tility to  the  government  it  was  the  part  of  wisdom  to  act 
promptly. 

With  the  prolonged  and  bitter  contest  between  the  presi- 
dent and  his  friends  and  the  majority  in  the  Senate,  with  the 
Senate's  censure  of  the  president  and  the  effort  to  expunge 
the  resolution  from  its  journal,  we  are  not  here  concerned. 
The  bank  was  unsuccessful  in  its  endeavor  to  secure  a  renewal 
of  its  corporate  powers  under  a  federal  charter,  and  its  in- 
terest as  a  fiscal  institution  of  national  importance  ceased  with 
1836.  In  regard  to  the  real  merits  of  the  question  of  re- 
charter  there  is  much  to  be  said  on  each  side.  The  strictly 
economic  or  fiscal  elements  of  the  controversy,  however,  are 
thrown  in  the  background  by  the  political  character  given  to 
the  contest.  Jackson  was  undoubtedly  driven  to  an  aggressive 
policy  by  the  fact  that  Clay  forced  his  political  followers  to 
make  the  support  of  the  bank  a  test  of  party  loyalty  in  the 
election  of  1832.  The  political  methods  used  by  Clay 
gave  color  to  the  charge  that  the  bank  was  in  truth  a  mon- 
ster; President  Biddle's  memorial  in  1832  asking  for  a  re- 
newal was  ill  worded ;  the  tactics  of  the  bank  to  secure  a 
favorable  consideration  were  calculated  to  arouse  suspicion 
in  the  mind  of  a  man  like  Jackson,  who  always  prided  himself 
on  standing  up  for  the  rights  of  the  plain  people.  Suspicion 
of  the  motives  of  the  bank  was  certainly  justified  when  it 
became  known  that  between  January,  1831,  and  May,  1832, 
the  loans  of  the  bank  had  been  extended  from  $42,000,000 
to  $70,000,000.  As  in  i8ti,  much  was  made  of  the  fact  that 
a  considerable  portion  of  the  stock  was  owned  by  foreigners, 
and  that  the  stock  held  in  this  country  was  in  the  control  of  a 
few  citizens,  chiefly  of  the  richest  class  ;  that  such  a  monopoly 
privilege  ought  not  to  be  sold  cheaply,  and  if  sold  at  all,  in  the 
words  of  Jackson,  it  should  "  not  be  bestowed  on  the  subjects 


§  89]  The  Pet  Banks.  209 

of  a  foreign  government  nor  upon  a  designated  and  favored 
class  of  men  in  our  own  country." 

Clay  was  to  a  large  degree  responsible  for  the  final  issue, 
since,  before  the  controversy  became  acute,  intimations  were 
made  to  Biddle  that  upon  certain  changes  in  the  charter 
the  renewal  might  be  accepted  by  the  president.  Clay, 
however,  counselled  against  modifications,  and  made  the 
grave  error  of  supposing  that  he  could  carry  the  presiden- 
tial campaign  in  1832  on  this  issue.  Three  elements  of  op- 
position were  too  strong  for  him  :  a  personal  following  who 
wished  to  endorse  Jackson,  irrespective  of  any  opinion  on  the 
bank  question ;  a  large  party  honestly  opposed  to  a  great 
centralized  moneyed  institution  as  dangerous  to  freedom  ;  and 
a  smaller  but  earnest  body  who  opposed  all  bank-note  issues 
of  every  sort.  Of  the  strength  of  this  opposition  Clay  was 
apparently  not  well  advised ;  for  the  popular  verdict  in  the 
election  of  1832  was  overwhelmingly  in  Jackson's  favor,  the 
latter  receiving  219  electoral  votes  to  49  for  Clay. 

89.  The  Pet  Banks. 

The  selection  of  State  banks  to  hold  the  funds  of  the 
government  was  made  with  care,  although  there  were  many 
heated  charges  that  the  choice  was  made  solely  on  political 
grounds ;  Jackson's  "  pets  "  became  one  of  the  catch-words 
of  party  campaigning.  The  conditions  imposed  upon  the 
banks  as  a  protection  to  the  government  were  fairly  stringent ; 
collateral  could  be  called  for,  if  the  secretary  of  the  treasury 
deemed  advisable,  and  must  be  given  if  the  deposits  exceeded 
one-half  a  bank's  capital ;  weekly  returns  of  the  condition  of 
the  bank  were  required,  and  the  bank  must  be  open  to  exami- 
nation at  any  time.  Economical  arrangements  were  also  made 
as  to  the  transfer  of  public  moneys  from  one  place  to  another, 
and  for  the  sale  of  bills  of  exchange  on  London  in  the  final 
settlement  of  the  public  indebtedness  held  abroad.  The  whole 
matter  carefully  defining  the  authority  of  the  government  and 
the  obligations  of  the  banks  was  finally  covered  by  the  act  of 

14 


2IO 


Attack  upon  the  Bank. 


[§90 


June  23,  1836,  "regulating  the  deposits  of  public  money." 
It  was  then  laid  down  that  any  bank  employed  as  a  depository 
should  credit  as  specie  all  sums  deposited  to  the  credit  of  the 
United  States,  and  that  no  bank  should  be  selected  which  did 
not  redeem  its  notes  in  specie  or  which  issued  any  note  of 
a  denomination  less  than  five  dollars.  It  was  further  provided 
that,  if  the  deposit  exceeded  a  fourth  part  of  the  bank's  capital 
for  at  least  three  months,  the  bank  should  pay  2  per  cent, 
interest  on  the  excess  deposit.  Apparently  the  interests  of 
the  government  were  well  safeguarded. 

The  number  of  banks  with  the  deposits  to  the  credit  of  the 
"  treasurer  "  and  "  other  officers  "  at  successive  dates  was  as 
follows  :  — 


Date 

Number  of 
banks 

Amounts 

January      i,  1835 
December  1,  1835 
November  1,  1836 

29 
33 
89 

$10,323,000 
24,724,000 
49,378,000 

90.     Change  in  Coinage  Ratio. 

The  attack  made  by  Jackson  upon  the  Second  United  States 
Bank  and  its  notes  issues,  together  with  the  demands  of  Benton 
for  a  larger  use  of  specie  and  especially  of  gold,  might,  even 
if  there  had  been  no  other  forces  at  work,  have  thrust  the 
question  of  metallic  currency  into  prominence.  For  several 
years  after  the  establishment  of  the  mint  in  1792  foreign  coins 
remained  legal  tender,  and  the  Spanish  dollar  and  its  divisions 
continued  to  form  the  bulk  of  the  metallic  circulation.  After 
1813  the  great  increase  in  paper  circulation  in  the  form  of 
bank-notes  tended  to  displace  all  forms  of  metal.  The  coinage 
at  the  mint  was  small ;  the  ratio  of  15  to  1,  established  in  1 792 
under  the  advice  of  Hamilton,  proved  to  be  an  undervaluation 
of  gold  as  established  in  the  world's  market  and  consequently 
no  gold  was  brought  to  the  mint ;  this  led  to  an  entire  discon- 


§9°]  Change  in  Coinage  Ratio.  211 

tinuance  of  the  coinage  of  gold  eagles  during  the  period 
1805— 1837,  and  in  fact  the  only  gold  coinage  between  1804  and 
1834  was  about  nine  million  dollars  in  the  form  of  half-eagles 
and  a  small  amount  of  quarter-eagles  at  irregular  intervals. 
The  mint  valuation  of  gold  proved  to  be  so  low  that  even 
the  smaller  coins  were  rapidly  exported.  In  the  first  ten 
years  of  the  mint's  operations  a  little  over  a  million  silver 
dollars  were  coined,  but  these  too  disappeared  from  circula- 
tion ;  upon  inquiry  it  was  learned  that  they  were  exchanged 
for  Spanish  dollars  and  left  the  country.  The  American 
dollar,  though  lighter  than  the  Spanish,  was  brighter  and  more 
serviceable  for  certain  kinds  of  foreign  trade,  and  was  there- 
fore sought  for  by  dealers,  while  Americans  were  desirous 
of  taking  the  Spanish  dollar  because  of  its  greater  weight. 
President  Jefferson  consequently  in  1806  ordered  the  discon- 
tinuance of  the  coinage  of  the  silver  dollar. 

The  embarrassments  thus  occasioned  by  the  lack  of  an  uni- 
form domestic  monetary  medium  were  repeatedly  brought  to 
the  attention  of  Congress,  and  various  plans  of  remedy  were 
proposed.  A  Senate  committee  in  1819  suggested  the  ex- 
pediency of  forbidding  the  export  of  domestic  coins.  Craw- 
ford, secretary  of  the  treasury,  proposed  a  change  in  the 
ratio  of  1  to  15.75,  and  in  1823  made  a  further  suggestion  in 
favor  of  1  to  16.  Secretary  Ingham  in  1830  advised  a  single 
standard  of  silver ;  a  Senate  committee  in  the  same  year 
recommended  a  ratio  of  1  to  15.9;  and  the  House  in  the 
course  of  four  years  enriched  monetary  literature  with  four 
reports.  The  outcome  of  all  this  deliberation  was  the  coinage 
act  of  June  28,  1834  (slightly  amended  in  1837),  by  which 
the  weight  of  the  gold  dollar  was  reduced  from  27  grains  to 
25ro  grains  nine-tenths  fine,  thus  establishing  a  ratio  of  ap- 
proximately 1  to  16.  This  ratio  in  turn  proved  to  be  an 
undervaluation  of  silver  and  led  to  the  withdrawal  of  silver 
dollars,  so  that  after  1840  this  coin  was  rarely  seen  in  circula- 
tion and  even  the  fractional  coins  tended  to  disappear.  The 
absence  of  silver  was  a  serious  disadvantage  to  retail  trade, 


212  Attack  upon  the  Bank.  [§91 

and  probably  had  much  to  do  with  supporting  a  demand  for 

a  larger  supply  of  bank  money.     To  keep  the  smaller  coins  in 

circulation  the  weight  of  the  pieces  less  than  one  dollar  was 

reduced  in   1853,  and    they  were  converted   into  subsidiary 

coins. 

91.    Internal  Improvements. 

The  question  of  federal  aid  for  internal  improvements  as- 
sumed new  importance  during  the  administration  of  President 
Jackson.  Ever  since  the  first  proposal  of  such  expenditures 
about  the  beginning  of  the  century  there  were  grave  misgivings 
on  the  part  of  many,  due  to  constitutional  objections,  and  this 
resulted  in  an  uncertain  policy.  There  were  two  questions 
involved  :  the  respect  which  the  national  government  owed  a 
State,  and  the  right  of  Congress  to  make  direct  appropriations 
in  favor  of  internal  improvements.  The  former  question  bore 
on  the  relations  of  a  federal  government  to  States,  a  tender 
subject  during  the  period  when  States  still  imagined  that  they 
were  clothed  with  some  of  the  regalia  of  sovereignty ;  the 
second  question  was  simply  one  aspect  of  the  meaning  of  the 
"  general  welfare  "  clause  of  the  Constitution,  an  enigma  which 
never  failed  to  provoke  dispute. 

The  first  federal  grants  for  roads  were  prompted  by  the 
need  of  better  means  of  communication  in  the  territories ; 
here  the  first  doubt  referred  to  was  obviously  not  involved  ; 
the  territories  could  not  legislate  for  themselves,  they  were 
under  the  guardianship  of  Congress.  From  the  time  there- 
fore that  Congress  made  a  small  grant  of  land  to  a  private 
individual  in  1 796  for  the  opening  up  of  a  road  from  Wheeling 
to  Maysville,  Kentucky,  no  objection  was  made  to  the  con- 
stitutionality of  such  appropriations ;  as  Benton  observed  in 
1824,  members  of  all  political  schools  voted  for  such  appro- 
priations, "the  strict  constructionists  generally  inquiring  if 
the  road  was  limited  to  the  territory,  and  voting  for  the  bill 
if  it  was." 

A  second  stream  of  expenditure  originated  in  the  legislation 
authorizing  the  admission  of  the  State  of  Ohio,  April  30,  1802, 


§  91]  Internal  Improvements.  213 

which  provided  that  one-twentieth  of  the  proceeds  of  the  sales 
of  public  lands  lying  within  Ohio,  which  might  be  sold  by 
Congress,  should  be  applied  to  the  building  of  public  roads 
from  the  navigable  waters  emptying  into  the  Atlantic  to  the 
Ohio  River,  with  the  consent  of  the  several  States  through 
which  the  road  should  pass ;  this  5  per  cent,  was  then 
divided  into  two  parts,  three-fifths  for  the  making  of  roads 
within  the  State  and  two-fifths  for  roads  leading  to  the  State  : 
and  here  was  the  origin  of  the  2  per  cent,  and  3  per  cent, 
funds  established  at  the  admission  of  many  of  the  common- 
wealths. In  many  cases  Congress  by  subsequent  legislation 
transferred  its  share  of  the  fund  to  the  State  on  condition  that 
the  money  be  expended  for  internal  improvements,  —  an  obli- 
gation unfortunately  not  always  kept.  By  an  act  of  May  1, 
1802,  the  secretary  of  the  treasury  was  granted  $6000  to  open 
such  roads  in  the  Northwest  Territory  as  would  best  serve  to 
promote  the  sale  of  public  lands.  The  most  important  step 
was  taken  in  1806,  when  (March  29)  Congress  entered  upon 
the  laying  out  of  a  road  from  the  head -waters  of  the  Potomac 
through  Pennsylvania  and  Virginia  to  the  State  of  Ohio  in 
accordance  with  the  conditions  of  the  act  of  1802  under  which 
Ohio  became  a  State.  This  was  the  inauguration  of  a  great 
public  work,  and  appropriations  were  made  in  succeeding 
years  with  hardly  an  objection;  the  act  of  1802  was  inter- 
preted as  a  compact  which  placed  appropriations  for  the 
Cumberland  Road  upon  a  different  footing  from  other  projects, 
and  under  this  theory  about  $2,500,000  were  expended  on  the 
work  during  the  first  quarter  of  the  century.  Other  improve- 
ments were  early  undertaken,  less  ambitious,  however,  in  their 
development,  as  roads  from  the  Mississippi  River  to  the  Ohio 
and  roads  in  the  Indian  country  of  the  Southwest.  Justifi- 
cation for  these  expenditures  was  easily  found  in  military 
necessity. 

Side  by  side  with  these  small  legislative  undertakings  was 
the  discussion  of  the  expediency  of  federal  aid  on  a  much  more 
liberal  scale.     Jefferson  in  his  second  inaugural  address,  1805, 


214  Attack  upon  the  Bank.  [§91 

declared  that  any  surplus  of  revenue  might  well  "  be  applied 
in  time  of  peace  to  rivers,  canals,  roads,  arts,  manufactures, 
education,  and  other  great  objects  within  each  State."  In 
1806  he  justified  even  more  emphatically  a  national  system 
on  the  ground  that  the  interests  of  the  States  would  be  identi- 
fied and  their  union  cemented  by  new  and  indissoluble  ties ; 
suggesting,  however,  that  a  constitutional  amendment  might 
be  necessary.  Gallatin,  ever  anxious  to  reduce  the  debt,  at 
first  did  not  encourage  the  application  of  revenue  to  such 
improvements;  but  the  surplus  of  1807  set  his  imagination  at 
work,  and  in  a  special  report  of  that  year  he  suggested  a  general 
scheme,  and  intimated  that  three  or  four  million  dollars 
might  be  available.  Commercial  disturbances  occasioned  by 
the  European  wars  and  the  embargo  put  to  flight  any  such 
extravagant  hopes. 

In  1816  Calhoun  secured  the  appointment  of  a  committee 
to  inquire  into  the  expediency  of  setting  apart  the  bonus  and 
profits  from  the  bank  of  the  United  States  as  a  fund  for  inter- 
nal improvement ;  but  the  bill  passed  at  the  next  session  to 
carry  out  this  plan  was  vetoed  by  Madison  "on  constitutional 
grounds.  Monroe  likewise,  though  friendly  to  federal  aid, 
was  troubled  by  constitutional  scruples,  and  in  1822  vetoed 
a  bill  appropriating  money  for  the  erection  of  toll-gates  upon 
the  Cumberland  Road ;  this  opposition,  however,  did  not 
extend  to  appropriations  for  the  repair  of  this  road,  or  even 
to  grants  of  aid  to  enterprises  which  were  initiated  under 
State  authority.  The  stricter  constructionists  realized  that 
their  position  was  unpopular,  and  in  the  hope  of  finding  a 
way  out  of  the  labyrinth  Senator  Van  Buren  in  1824  pro- 
posed a  constitutional  amendment  giving  Congress  the  power  to 
construct  roads  and  canals,  and  recommended  that  money 
appropriated  be  apportioned  among  the  States  according  to 
population.  Clay  in  the  meantime  was  enlarging  his  reputa- 
tion by  eager  championship  of  generous  expenditures  for 
internal  improvement,  and  aroused  a  patriotic  interest  in  his 
appeals  for  national  arteries  of  communication  as  a  means  of 


§9T]  Internal  Improvements.  215 

military  defence,  for  lack  of  which  millions  of  dollars  and 
precious  blood  had  been  lost  on  the  Northwest  frontier. 
President  John  Quincy  Adams  was  equally  devoted  to  the 
cause,  and  beginning  with  his  presidency  in  1825  appropria- 
tions for  surveys  and  construction  of  roads  and  canals  were 
increased,  and  even  railroads  were  planned  for.  The  pros- 
pect of  an  overflowing  treasury  within  a  few  years  naturally 
stimulated  projects  for  expenditures.  Committees  and  engi- 
neers planned  works  the  probable  cost  of  which  it  was  estimated 
in  1830  would  amount  to  $96,000,000. 

A  halt  was  made  when  Jackson  became  president ;  while 
senator  five  years  before  he  had  repeatedly  voted  in  favor  of 
internal  improvement  bills,  as  for  surveys,  roads  in  Florida, 
Arkansas,  and  in  Missouri,  already  a  State,  and  for  subscrip- 
tions to  at  least  two  canal  companies.  Between  1825  and 
1829  Jackson's  political  convictions  underwent  a  change 
which  brought  him  into  closer  harmony  with  the  stricter 
constructionists;  the  change,  however,  was  due  to  a  sincere 
belief  that  democratic  government  was  threatened  by  great 
moneyed  interests  rather  than  to  fine-spun  interpretations  of 
the  Constitution.  On  May  27,  1830,  Jackson  returned  a  bill 
appropriating  money  for  the  Maysville  Road,  basing  his  objec- 
tion specifically  in  this  case  upon  the  purely  local  character 
of  the  work  projected,  which  was  entirely  within  the  limits  of 
one  State.  He  was  not  then  ready  to  express  an  opinion  as 
to  whether  he  would  veto  a  bill  appropriating  money  for  con- 
struction of  works  which  were  national  in  character,  but  he  did 
not  consider  it  expedient  for  the  national  government  at  that 
time  to  embark  in  a  general  system ;  like  Madison  and 
Monroe  he  testified  to  the  benefits  of  internal  improvement 
but  wished  an  amendment  to  the  Constitution  enlarging  the 
powers  of  the  government.  Jackson  followed  this  veto  with 
another  within  a  few  days,  returning  a  bill  for  a  subscription 
to  stock  in  the  Washington  Turnpike  Company,  and  at  the 
end  of  the  session  pocketed  a  general  bill  for  improve- 
ment of  harbors  and  the  construction  of  light-houses  on  the 


216  Attack  upon  the  Bank.  [§92 

ground  that  it  contained  items  of  local  character.  Jackson 
put  his  criticism  on  more  popular  ground  a  year  later  when 
he  animadverted  against  the  system  of  federal  subscriptions 
to  private  incorporated  enterprises  because  the  power  of  the 
government  over  the  stockholders  would  be  dangerous  to  the 
liberties  of  the  people  and  the  relationship  thus  established 
would  be  used  to  influence  elections.  Jackson's  opposition  put 
an  end  for  a  time  to  further  appropriations  for  internal  im- 
provements under  separate  bills,  excepting  expenditures  for 
the  improvement  of  harbors  and  the  removal  of  obstructions 
in  navigable  rivers  for  the  security  of  foreign  commerce.  Some 
appropriations,  however,  were  got  through  by  putting  them  in 
the  form  of  riders  so  as  to  escape  a  veto. 

Expenditures  for  roads  and  canals,  1 802-1 835,  were  as 
follows,  arranged  by  five-year  periods  :  — 

1802-1805 $5,000 

1806-1810 94,000 

181 1—1815 364,000 

1816-1820      1,475,000 

1821-1825      635,000 

1826-1830   2,737,000 

1831-1835   • 4,210,000 

92.      Sales  of  Public  Lands. 

At  the  close  of  the  Revolutionary  War  the  federal  govern- 
ment came  into  possession  of  an  enormous  domain  by  the 
cessions  of  claims  by  Eastern  States  to  Western  lands.  In  its 
early  phases  the  subject  hardly  enters  into  a  financial  history, 
because  the  hope  which  Washington  and  Jefferson  confidently 
held,  that  the  sale  of  land  would  extinguish  the  debt,  proved 
a  mistake.  From  1785  to  1800  only  a  little  cash  was 
received,  and  but  a  small  quantity  of  bonds.  In  1800  a 
radical  change  was  made  in  the  land  policy  by  creating  many 
land-offices  and  by  selling  on  credit,  the  time  for  payment 
being  extended  over  a  period  of  four  years.  The  credit 
system  led  to  incomplete  payments  with  vexatious  readjust- 
ments, and  many  pioneers,  encouraged   by    the    easy  terms 


§93]  Surplus  Revenue.  217 

offered  by  the  government,  later  found  it  extremely  difficult 
to  extinguish  their  indebtedness.  Sales  by  the  government 
were  made  more  rapidly,  but,  on  the  other  hand,  many  for- 
feitures took  place,  and  in  1820  land  buyers  owed  the  gov- 
ernment over  $21,000,000.  Petitions  were  presented  to 
Congress  year  by  year  to  relieve  settlers  who  defaulted  pay- 
ments. Finally  in  1820,  after  the  panic  of  181 9  had  brought 
the  evils  to  a  crisis,  the  credit  system  was  abolished ;  but,  as 
a  partial  compensation  for  a  less  liberal  policy  as  to  credits, 
the  normal  price  of  the  land  was  reduced  to  $1.25  per  acre. 

Between  18 10  and  1830  the  annual  proceeds  from  the  sale  of 
land  ranged  between  one  and  two  million  dollars  ;  but  beginning 
with  1830  there  was  a  considerable  increase,  until  in  1834  the 
receipts  were  nearly  $5,000,000;  in  1835,  $14,757,600;  in 
1836,  $24,877,179  ;  in  1837,  $6,776,236.  In  1836  for  the  first 
and  last  time  the  revenue  from  this  source  exceeded  that  from 
customs.  Since  these  proceeds  were  not  required  for  the 
necessary  expenditures  of  the  government  various  proposals 
were  made  for  cutting  off  this  element  of  revenue ;  one  plan 
was  to  give  the  new  Western  States  all  the  land  within  their 
respective  borders,  thus  disregarding  the  conditions  of  use  for 
common  benefit  made  by  the  original  States  ;  others  were  un- 
willing to  go  so  far  but  favored  the  distribution  of  a  part  of  the 
proceeds  of  the  sales  to  the  newer  States.  Political  and  sec- 
tional interests  were  involved  ;  the  West  naturally  desired  a 
liberal  policy  of  sale  or  grant  of  land ;  and  such  a  policy  like- 
wise fell  in  with  the  interests  of  the  high-tariff  party  of  the 
East,  who  feared  that  if  the  revenue  became  excessive  the 
tariff  must  be  lowered.  Before  any  plan  could  be  drafted  to 
prevent  the  accumulation  of  funds  the  country  had  to  face  a 
larger  question,  the  disposition  of  the  surplus. 

93.   Surplus  Revenue. 

The  possibility  of  a  surplus  revenue  had  been  suggested 
early  in  the  history  of  our  government.  Jefferson,  in  his 
inaugural  address  in  1805,  foresaw  that  a  policy  of  economy 


2i 8  Attack  upon  the  Bank.  [§93 

coupled  with  national  prosperity  might  lead  to  an  overflowing 
treasury,  and,  as  already  observed,  advocated  a  constitutional 
amendment  clearly  authorizing  the  use  of  government  funds 
for  internal  improvements,  arts,  and  education.  Though 
delayed  by  the  War  of  18 12  the  prophecy  of  1805  became  a 
reality  in  less  than  thirty  years.  The  question  of  a  surplus 
as  a  subject  for  legislation  did  not  come  up  again  until  after 
the  depression  of  1819— 1823;  but  in  1826,  when  the  ex- 
tinction of  the  debt  appeared  to  be  near,  a  bill  was  intro- 
duced into  the  Senate  providing  that  rive  million  dollars 
be  taken  annually  for  four  years  from  the  sinking  fund,  and 
be  distributed  among  the  different  States,  in  aid  of  internal 
improvements  and  education.  The  bill  went  no  farther  than 
to  occasion  a  brief  debate  in  which  it  was  pointed  out  that 
the  chief  object  of  such  a  measure  was  to  perpetuate  a  pro- 
tective system;  and  Jackson  in  his  first  message  in  1829 
seemed  to  take  that  view,  for  he  recommended  an  appor- 
tionment of  surplus  funds  among  the  several  States  inasmuch 
as  no  satisfactory  adjustment  of  the  tariff  appeared  possible. 
Jackson  soon  repented  of  this  suggestion  and  advised  a  reduc- 
tion of  the  tariff  duties ;  and  then  in  1832  held  that  the  lands 
should  not  be  made  a  source  of  revenue,  but  sold  at  nominal 
cost  to  settlers.  He  argued  that  as  the  "  adventurous  and 
hardy  population  of  the  West "  did  not  receive  their  propor- 
tionate share  of  enjoyments  from  expenditures  by  the  govern- 
ment, and  as  the  real  value  of  the  land  was  due  to  their  labor, 
they  should  be  treated  with  special  consideration. 

In  1 83 1  the  Legislature  of  Pennsylvania,  true  to  its  protec- 
tionist interests,  passed  a  resolution  in  favor  of  distribution  ; 
and  in  1832  Clay  brought  the  question  once  more  before 
Congress  by  proposing  that  the  revenue  from  lands  be  .appor- 
tioned among  the  several  States.  The  measure  was  vetoed, 
and  in  1834  a  slight  disturbance  in  business  made  it  expe- 
dient not  to  attempt  to  deplete  the  treasury.  A  reduction 
in  tariff  duties,  however,  was  no  longer  an  available  remedy, 
because  the  compromise  tariff,  enacted  only  after  a  long  and 


§94]  Distribution  of  the  Surplus.  219 

bitter    struggle,  was    held    in   special    regard  as  a  settlement 
almost  sacred  in  character  and  not  lightly  to  be  touched. 

94.  Distribution  of  the  Surplus. 

In  January,  1835,  the  national  debt  was  paid  off;  the  exist- 
ence of  a  surplus  was  an  assured  fact,  and  a  committee  of  the 
Senate  estimated  that  it  would  amount  to  nine  millions  each 
year  for  the  next  eight  years.  What  was  to  be  done  with  it? 
Everybody  knew  that  the  surplus  excited  wild  speculation,  and 
many  people  were  sure  that  the  money  thus  drawn  from  the 
great  commercial  centres  and  stored  in  remote  banks  was 
loaned  to  the  profit  of  those  who  proved  their  loyalty  to  the 
administration.  Clay  renewed  his  proposition,  and  introduced 
a  bill  authorizing  that  10  per  cent,  of  the  net  proceeds  of  the 
land  sales  should  be  left  in  the  treasury  and  that  the  residue 
be  distributed.  The  obvious  objection  to  the  distribution  of 
the  proceeds  of  land  sales  was  that  the  public  lands  had  been 
originally  ceded  to  the  federal  government  for  the  specific  pur- 
pose of  paying  the  debt  created  by  the  Revolutionary  War ; 
and  that  as  an  integral  part  of  the  national  income  it  could  not 
be  alienated  to  any  State  in  particular.  Moreover,  the  Consti- 
tution required  that  all  revenue  should  be  appropriated  for  cer- 
tain definite  objects  concerned  with  defence,  protection,  or  the 
general  welfare  of  the  United  States  ;  distribution  to  the  States 
would  not  be  such  an  appropriation,  and  the  bill  specified  no 
constitutional  purpose  to  which  the  money  must  finally  be  ap- 
plied by  the  States ;  nor  could  there  be  such  a  limitation, 
since  Congress  had  no  power  to  compel  the  States  to  apply 
the  money  to  any  specific  object.  Apart  from  legal  objec- 
tions, other  arguments  lay  against  Clay's  measure :  some 
people.*  wished  to  have  the  money  spent  by  the  national 
government  on  fortifications,  as  a  specially  fit  use  of  a  fund 
which  had  accrued  from  the  sale  of  the  national  domain ;  the 
most  valuable  inheritance  that  any  nation  ever  possessed 
ought,  it  was  said,  to  be  reinvested  in  permanent  works  for 
the    common    benefit    and    security   of    the    whole   country. 


220  Attack  upon  the  Bank.  [§94 

Secretary  Woodbury  in  1834  even  suggested  that  the  govern- 
ment make  "  a  temporary  investment  in  some  stocks  sound 
and  salable." 

A  distribution  scheme  pure  and  simple  could  not  pass 
Congress,  and  so  the  basis  of  legislation  was  changed  ;  the 
bill  of  1836  proposed  that  the  States  be  made  the  depositories 
of  the  surplus,  which  should  be  subject  to  the  demands  of  the 
treasury.  The  constitutional  objections  to  a  regular  distribu- 
tion bill  being  thus  removed,  or  rather  obscured,  the  bill 
was  passed  June  23,  1836  ;  it  provided  that  the  money  in  the 
treasury  January  1,  1837,  reserving  the  sum  of  $5,000,000, 
should  be  deposited  with  the  several  States  in  proportion  to 
their  respective  representation  in  the  Senate  and  House.  In 
return  for  the  deposits  the  secretary  of  the  treasury  received 
certificates  which  set  forth  the  obligations  of  the  States  to  pay 
the  amount  expressed  to  the  United  States  or  their  assigns,  and 
he  was  given  power  to  sell  or  assign  these  certificates  whenever 
necessary  for  want  of  other  money  in  the  treasury  ;  and  it  was 
further  provided  that  these  certificates  should  bear  an  interest 
of  5  per  cent,  from  the  time  of  their  sale  or  assignment, 
redeemable  at  the  pleasure  of  the  States.  When  January  1 
came  around  it  was  found  that  under  the  terms  of  the  act 
about  $37,000,000  would  be  available  for  deposit;  as  will  be 
seen,  owing  to  financial  difficulties  in  1837,  the  government 
was  unable  to  transfer  the  whole  of  this  sum ;  in  all  about 
$28,000,000  was  paid  over. 

As  Edward  G.  Bourne,  the  historian  of  the  surplus,  observes, 
the  act  was  a  makeshift :  it  was  not  wholly  satisfactory  to  the 
Whigs,  who  wanted  unqualified  distribution  ;  some  of  the  States 
of  the  free-trade  South  received  their  shares  with  protest,  and 
only  because  if  they  refused,  the  North  would  get  them  ;  others 
regarded  the  money  as  but  a  slight  alleviation  of  the  iniquitous 
exactions  of  the  tariff  and  yet  not  to  be  despised  ;  while  the 
administration  saw  no  other  practical  way  out  of  the  dilemma. 

In  spite  of  the  statutory  provisions  relating  to  the  deposit  of 
funds,  and  the  fact  that  Secretary  Woodbury  in  his  report  for 


§94]  Distribution  of  the  Surplus.  221 

1836  referred  to  the  disposition  of  the  funds  as  temporary  ami 
discussed  anew  the  investment  of  surplus  funds,  everybody 
understood  that  it  was  an  outright  gift ;  and  to  this  day  not 
a  dollar  has  been  called  for.  The  idea  of  a  douceur  was  so 
deeply  rooted  that  it  was  subsequently  claimed  that  the  govern- 
ment could  not  withhold  the  final  instalment,  which  was  un- 
paid owing  to  the  embarrassments  arising  in  1837  ;  the  act 
was  alleged  to  have  created  a  contract  between  the  na- 
tional government  and  the  States,  by  which  the  £37,000,000 
belonged  to  the  States  the  moment  the  act  was  passed. 
Benton  forcibly  described  the  measure  :  "  It  is  in  name  a 
deposit ;  in  form  a  loan ;  in  essential  design  a  distribution. 
All  this  verbiage  about  a  deposit  is  nothing  but  the  device  and 
contrivance  of  those  who  have  been  for  years  endeavoring  to 
distribute  the  revenues,  sometimes  by  the  land  bill,  sometimes 
by  direct  propositions,  and  sometimes  by  proposed  amend- 
ments to  the  Constitution."  Clay  told  his  constituents  in 
Kentucky  that  he  did  not  believe  that  a  single  member  of 
either  House  believed  that  a  single  dollar  would  be  recalled  ; 
Calhoun  in  1841  said  that  he  still  regarded  it  as  simply  a 
deposit,  but  he  thought  it  should  never  be  withdrawn  ex- 
cept in  case  of  war.  Governor  Seward  in  his  message  of 
1 841  stated  that  it  was  well  understood  by  Congress  that 
the  form  of  a  deposit  was  adopted  to  save  the  bill  from  the 
veto  of  the  federal  executive.  Notwithstanding  these  opinions 
the  treasury  has  carried  on  its  books  the  sum  deposited  as 
part  of  its  cash  balance,  and  to  this  day  the  money  thus 
deposited  stands  on  the  books  of  the  treasury  as  unavailable 
funds,  $28,101,644. 

In  1883  the  State  of  Virginia  made  a  claim  upon  the  secre- 
tary of  the  treasury  for  the  deposit  of  the  fourth  instalment, 
and  appealed  to  the  Supreme  Court  of  the  United  States  for  a 
mandamus  to  compel  the  secretary  of  the  treasury  to  deposit 
with  the  State  an  amount  equal  to  the  fourth  instalment, 
namely  $732,809.  The  court,  however,  held  that  the  act  of 
June  23,  1836,  created  no  debt  or  legal  obligation  on  the  part 


222  Attack  upon  the  Bank.  [§94 

of  the  government,  but  only  made  the  States  the  depositories 
temporarily  of  a  portion  of  the  public  revenue  not  needed,  as 
it  was  then  supposed,  for  the  purposes  of  the  United  States. 

The  uses  made  of  the  funds  distributed  were  various. 
Massachusetts  distributed  them  among  the  towns :  Boston 
used  the  money  for  current  expenses ;  Salem  built  a  town  hall ; 
Groton  repaired  a  broken  bridge.  The  State  of  Maine  made  a 
per  capita  distribution  ;  some  States  used  the  money  for  internal 
improvements,  while  a  few  saved  it  and  use  its  income  to-day 
for  educational  and  other  purposes. 


CHAPTER  X. 
PANIC    OF   1837    AND   RESTORATION   OF  CREDIT. 

95.   References. 
Bibliographies:   Bogart  and  Rawles,  39-42;   Channing  and  Hart, 

38I-383- 

Specie  Circular  :  W.  MacDonald,  Select  Documents,  ^7~329  '>  or 
Dunbar,  270-271  ;  or  Messages  and  Papers,  X,  104;  Benton's  Abridgment, 
XIII,  57-67,  92-99,  162-190,  331-333;  Finance  Reports,  III,  764;  IV,  38- 
49;  T.  H.  Benton,  Thirty  Years,  I,  676-678;  Bolles,  II,  348-350. 

Panic  of  1837  :  Messages  and  Papers,  III,  324-346  (special  message, 
Sept.  4,  1837)  ;  Finance  Reports,  IV,  28-31,  233;  Statutes,  V,  201  (sus- 
pension of  revenue  deposits),  206  (relief  of  deposit  banks)  ;  or  Dunbar, 
118-120;  T.   H.  Benton,    ThirtyYears,  11,9-67;  A.  Gallatin,  Writings, 

III,  390-406;  H.  von  Hoist,  Constitutional  History  of  U.  S.,  II,  173-216 
(references  in  foot-notes)  ;  Bolles,  II,  346-352 ;  C  A.  Conant,  History 
of  Modern  Banking,  479-485  ;  W.  G.  Sumner,  History  of  American  Cur- 
rency, 132-161 ;  J.  B.  Phillips,  Methods  of  Keeping  the  Public  Money  {Pub. 
Mich.  Polit.  Sci.  Assn.),  71-83;  E.  M.  Shepard,  Van  Buren,  242-277; 
C.  Schurz,  Clay,  II,  113-127;  T.  Roosevelt,  Benton,  189-208;  J.  A. 
Stevens,  Gallatin,  280-286;  Schouler,  IV,  257-279. 

Treasury  Notes  and  Loans:  Statutes,  V,  201,  614;  or  Dunbar, 
1 18-132;  Benton's  Abridgment,  XIII,  351-367,  479-520,  661-679;  D. 
Webster,  Works,  IV,  324-370;  Bayley,  361-364;  De  Knight,  62-68; 
J.  J.  Knox,  United  States  Arotes,  40-62. 

Independent  Treasury:  Finance  Reports,  IV,  10-15  (Woodbury, 
Sept.  5,  1835),  192-19S,  362-364  (1840),  444  (1841)  ;  Benton's  Abridgment, 
XIII,  374  et  seq.;  Statutes,  V,  385  (Act  of  1840),  439  (repeal,  1841); 
T.  H.  Benton,  Thirty  Years,  II,  124,  219-228;  D.  Webster,  Works,  IV, 
402-499;  D.  Kinley,  Independent  Treasury  System,  23-39;  J.  B.  Phillips, 
Methods  of  Keeping  the  Public  Money,  103-111;  E.  M.  Shepard,  Van 
Buren,  278-299;  C.  Schurz,  Clay,  II,  136-151,  202-210  (Tyler). 

Tariff  of  1842:  Finance  Reports,  IV,  464-469;  Messages  and  Papers, 

IV,  180,  183  (vetoes);  Benton's  Abridgment,  XIV;  Statutes,  V,  548; 
T,  H.  Benton,  Thirty  Years,  II,  307-317,  410-417  ;  J.  C.  Calhoun,  Works, 
IV,  199-200;  E.  Young,  Customs  Tariff  Legislation,  lxxxix;  H.  von 
Hoist,  Constitutional  History  of  the  U.  S.,  Ill,  451-464  ;  Bolles,  II,  434- 
448;  F.  W.  Taussig,  Tariff  History,  11 2-1 14;  C.  Schurz,  Clay,  II,  198- 
227  (general  politics);  Schouler,  IV,  406-412. 

Struggle  for  Bank  :  Messages  and  Papers,  IV,  63-68  (veto,  Aug.  16, 
1841) ;  68-72  (veto,  Sept.  9,  1841) ;  Finance  Reports,  IV,  445-447  (1841); 
Benton's   Abridgment,   XIV,   309-324,  34S-384;   T.   H.  Benton,   Thirty 

223 


224     Panic  and  Restoration  of  Credit.      [§96 

Years,  II,  317-356,  376-394  ;  E.  C.  Mason,  The  Veto  Power  (Harvard 
Hist.  Monographs,  No.  1),  76,  145;  Bolles,  II,  353;  T.  Roosevelt,  Ben- 
ton, 239-259  ;  Schouler,  IV,  384-392. 

Expenditures:  Finance  Reports,  IV,  186  (1838),  239-242  (1839); 
Benton's  Abridgment,  XIV,  1 28-133;  T.  H.  Benton,  Thirty  Years,  II, 
198-202;  Bolles,  II,  539-589;  Schouler,  IV,  327. 

Repudiation  :  W.  A.  Scott,  Repudiation  of  State  Debts  (bibliography), 
W.  G.  Sumner,  History  of  American  Currency,  162 ;  C.  Schurz,  Clay,  II, 
211 ;  Schouler,  IV,  419-420. 

96.   Speculative  Prosperity. 

The  extraordinary  plethora  of  the  treasury  at  the  time  of  the 
distribution  act  of  1836  seemed  based  upon  the  general  pros- 
perity of  the  nation ;  in  order,  therefore,  to  understand  the 
significance  of  the  panic  of  1837  and  the  relations  of  the  more 
important  fiscal  events  of  this  period  it  is  necessary  to  consider 
certain  points  connected  with  the  general  economic  develop- 
ment of  the  country  since  1820.  It  was  a  period  of  international 
peace  and  an  era  of  great  territorial  and  business  expansion, 
leading  as  usually  happens  to  an  undue  extension  of  credit  and 
speculation.  Banking  disorders  were  for  a  time  at  least  not 
serious,  and  manufacturing  had  recovered  from  the  depression 
succeeding  the  War  of  18 12.  There  was  little  to  distract  or 
disturb  the  normal  course  of  material  enterprise.  Each  suc- 
ceeding presidential  message  naturally  referred  to  the  continued 
prosperity  of  the  country. 

The  central  point  in  this  development  was  land  settlement 
complicated  by  land  buying  for  future  sale.  The  construction 
of  the  Erie  Canal  from  1817  to  1825  opened  up  the  land  all 
along  the  great  lakes;  between  1820  and  1840,  Ohio  increased 
in  population  from  581,295  to  1,519,467;  Indiana  from 
147,178  to  685,866;  Illinois  from  55,162  to  476,183;  and 
Michigan  from  8,765  to  212,267.  The  fertile  soil  disclosed 
in  these  Western  prairies  compared  with  the  rigors  of  agricult- 
ural life  on  the  Atlantic  seaboard  excited  the  imagination  and 
naturally  led  to  exaggerated  hopes. 

The  Erie  Canal  was  but  one  of  many  highways  to  the  in- 
terior ;    canals    penetrated    far    up    to    the    foot-hills  of   the 


§96] 


Speculative  Prosperity. 


25 


Alleghanies ;  the  Cumberland  Road  was  carrying  thousands  of 
emigrants;  railroad  construction  began  in  1830.  It  was  an 
age  of  internal  improvements  and  the  possibilities  of  the  future 
seemed  unlimited.  The  too  generous  credit  system  of  the 
government  toward  land  purchasers,  which  has  been  already 
described,  stimulated  still  further  the  feeling  that  the  success 
of  the  future  would  make  up  for  any  imperfection  in  present 
achievement.  As  the  market  value  of  land  frequently  rose  to 
much  above  the  government  selling-price  there  was  an  eager 
contest  on  the  part  of  those  who  could  borrow  money,  to  buy 
for  speedy  sale  at  an  advanced  price  or  to  hold  the  land 
for  a  future  profit.  Borrowers  found  ready  accommodation 
at  local  banks,  and  with  the  loans  thus  secured  made  their  pur- 
chases from  the  land  receiver ;  the  purchase-money  in  many 
instances  was  thereupon  re-deposited  by  the  government  in  the 
bank  whence  it  came,  where  it  once  more  served  as  a  loan  to 
another  or  even  to  the  same  land  speculator.  These  local 
banks  and  the  government  surplus  thus  became  involved  in  a 
common  network  of  credits ;  banks  were  established  to  meet 
this  temporary  demand,  so  that  the  lender  leaned  upon  the 
borrower.  The  administrative  hostility  to  the  United  States 
Bank  and  the  hope  of  securing  government  deposits  also  gave 
impetus  to  the  development  of  local  banks. 

The  bank  expansion  which  took  place  under  this  stimulus  is 
seen  in  the  following  table  (amounts  in  millions  of  dollars)  : 


Year 

Number  of 
banks 

Capital 

Circulation 

Loans 

1829 

329 

1 10.2 

48.2 

'37-o 

1834 

506 

200.0 

94.8 

324-' 

1835 

704 

23>.2 

103.7 

3652 

1836 

7'3 

25'-9 

140.3 

457-5 

1837 

788 

290.8 

149.2 

525-i 

1838 

829 

3176 

116. 1 

485.6 

1839 

840 

327-' 

«3S-2 

492-3 

1840 

901 

358.4 

107.0 

462.9 

1841 

784 

313-6 

•07-3 

386.5 

1842 

692 

260.2 

83-7 

324.0 

1843 

691 

228.9 

58.6 

254-5 

1844 

696 

210.9 

75.2 

264.9 

1845 

707 

206.0 

896 

288.6 

226       Panic  and  Restoration  of  Credit.      [§96 

Land  speculation  was  also  helped  by  the  fact  that  the 
government  was  no  longer  a  borrower  from  the  public  after 
the  payment  of  the  public  debt,  either  for  long  or  temporary 
loans ;  hence  a  considerable  amount  of  capital  was  set  free  for 
reinvestment ;  furthermore  the  surplus  funds  of  the  government 
deposited  in  local  banks  encouraged  these  institutions  to  make 
loans  out  of  proportion  to  actual  assets.  Between  1830  and 
1837  the  imports  of  merchandise  exceeded  the  exports  by 
$140,000,000  ;  and,  instead  of  demanding  the  payment  of  this 
balance  in  specie,  foreigners  left  substantially  the  whole  amount 
invested  in  the  United  States,  a  fact  evidenced  by  an  excess 
of  imports  of  specie  over  exports  amounting  to  $44,700,000. 
"  The  foreigners,"  says  Shepard  in  his  "  Van  Buren,"  "  there- 
fore took  pay  for  their  goods  not  only  in  our  raw  materials,  but 
in  part  also  in  our  investments,  or  rather  our  speculations,  and 
sent  these  vast  quantities  of  money  besides.  So  our  good  fort- 
une fired  the  imaginations  of  even  the  dull  Europeans.  They 
helped  to  feed  and  clothe  us  that  we  might  experiment  with 
Aladdin's  lamp."  Foreigners  invested  in  the  new  railroad  in- 
dustry and  more  particularly  in  the  bonds  issued  by  States  and 
municipalities.  This  credit  expansion  was  made  the  more  easy 
because  of  improvements  in  communication  between  Europe 
and  America.  It  is  also  probable  that  American  capital  was 
withdrawn  from  agriculture  and  directed  into  more  speculative 
enterprises ;  the  value  of  flour  and  grain  imported  into  the 
United  States  as  a  rule  was  insignificant,  while  that  exported 
after  1830  was  on  the  average  about  six  million  dollars  an- 
nually; in  1837,  however,  the  exports  of  grain  fell  off  nearly 
a  million  dollars  while  the  imports  of  grain  were  increased 
more  than  four  and  a  half  million  dollars. 

Speculation  was  not  confined  to  Western  lands ;  there  was 
equal  recklessness  over  cotton  plantations  in  the  Southwest, 
particularly  in  Mississippi  and  Louisiana,  and  in  the  real  estate 
of  the  cities  which  controlled  the  cotton  trade ;  the  demand 
for  the  raw  staple  was  greatly  increased  by  the  growth  of 
manufactures  of  cotton  goods  in  this  country  and  by  favorable 


§97]  The  Specie  Circular.  227 

conditions  in  England.  The  result  was  a  rapid  advance  in 
the  price  of  cotton,  and  also  in  the  cotton  crop  which  in 
Tennessee,  Alabama,  Mississippi,  Arkansas,  Louisiana,  and 
Florida  increased  from  536,000  bales  in  1833  to  916,000 
bales  in  1837.  In  1833  the  price  of  cotton  ranged  between 
n}4  and  13^  cents  a  pound;  in  1834  between  ny§  and 
13^  ;  in  1835  between  14  and  20.  Southern  cities  looked 
forward  to  a  continuance  of  the  great  prosperity ;  at  Mobile 
for  example  the  assessed  valuation  of  real  estate  increased 
from  $4,000,000  in  1834  to  $27,000,000  in  1837,  although 
the  number  of  polls  assessed  in  the  latter  year  was  less  than 
in  the  former. 

97.  The  Specie  Circular. 

On  July  n,  1836,  the  treasury  department  issued  what  is 
termed  the  specie  circular,  an  order  that  agents  for  the  sale 
of  public  lands  should  take  in  payment  only  specie,  and  no 
longer  receive  the  notes  issued  by  banks.  As  the  whole  ques- 
tion of  the  character  of  moneys  receivable  by  the  United  States 
for  duties  and  other  obligations  became  a  subject  of  debate  in 
1837  this  is  a  fitting  place  to  review  the  previous  policy  of  the 
government  as  to  the  medium  which  could  lawfully  be  tendered 
for  taxes  owed  and  for  lands  bought.  One  of  the  earliest  acts 
passed  by  the  first  Congress  was  that  of  July  31,  1789,  ex- 
pressly requiring  all  duties  to  be  paid  in  gold  and  silver  only. 
Hamilton  gave  a  liberal  construction  to  this  act,  and  by  a 
circular  of  September  22,  1789,  ordered  that  the  notes  of  the 
Bank  of  North  America  and  the  Bank  of  New  York,  payable 
either  on  demand  or  within  thirty  days,  should  be  received  in 
payment  of  duties  as  equivalent  to  gold  or  silver.  This  action 
was  defended  in  a  report  of  April  22,  1790,  on  the  ground  that 
the  law  had  for  its  object  the  exclusion  of  payments  in  paper 
emissions  of  the  several  State  banks ;  it  was  not  intended  to 
hinder  the  treasury  from  making  such  arrangements  as  its  exi- 
gencies might  dictate  ;  it  was  not  to  prevent  if  necessary  an 
anticipation  of   the  duties    by  treasury  drafts  at    the  several 


228      Panic  and  Restoration  of  Credit.       [§  97 

custom  houses,  nor  to  prevent  the  receipt  of  the  notes  of  a 
public  bank  issued  on  a  specie  fund.  The  charter  of  the 
First  United  States  Bank,  1791,  expressly  provided  that  the 
notes  of  that  institution  should  be  so  receivable.  In  regard  to 
payments  for  public  lands  a  statute  of  i  796  required  that  lands 
be  paid  for  in  "money";  the  act  of  March  3,  1797,  added 
"evidences  of  the  public  debt";  under  the  act  of  May  10, 
1800,  specie  or  evidences  of  the  public  debt  were  required  ; 
and  in  18 12  treasury  notes  were  made  acceptable.  By  a  joint 
resolution  approved  April  30,  18 16,  which  was  still  in  govern- 
ance in  1836,  it  was  provided  that  all  duties,  taxes,  debts,  or 
sums  of  money  accruing  or  becoming  payable  to  the  United 
States  should  be  collected  and  paid  in  the  legal  currency  of 
the  United  States,  or  treasury  notes,  or  notes  of  the  Bank  of 
the  United  States,  or  in  notes  of  banks  which  are  payable  and 
paid  on  demand  in  the  legal  currency  of  the  United  States. 

In  a  treasury  circular  of  April  6,  1835,  a^  collecting  and 
receiving  officers  were  instructed  not  to  receive  any  bank-notes 
in  denominations  of  less  than  five  dollars,  and  intimation  was 
given  that  the  restriction  would  soon  be  extended  to  denomi- 
nations of  less  than  ten  dollars,  and  that  banks  which  continued 
the  circulation  of  such  notes  would  not  be  selected  for  fiscal 
agents.  Again  in  an  act  of  April  14,  1836,  it  was  ordered  that 
the  United  States  government  should  not  pay  out  any  bank- 
note of  any  denomination  unless  the  same  were  payable  on 
demand  in  gold  or  silver  coin  at  the  place  where  issued,  "and 
which  shall  not  be  equivalent  to  specie  at  the  place  where  of- 
fered, and  convertible  into  gold  or  silver  upon  the  spot,  at  the 
will  of  the  holder."  It  will  thus  be  seen  that  the  action  of  the 
treasury  department  was  not  precipitate ;  its  policy  for  at  least 
a  year  had  been  toward  restricting  the  volume  of  bank-notes 
and  increasing  the  circulation  of  specie.  In  issuing  the  specie 
circular  of  July  11,  1836,  Secretary  Woodbury  declared  that 
the  order  had  for  its  object  the  repression  of  alleged  frauds, 
the  lessening  of  opportunities  on  the  part  of  speculators  to 
secure   a   monopoly  of  public   lands  to   the  injury  of  actual 


.  §  98]  Panic  of  1 837.  229 

settlers  in  the  new  States,  and  the  discouragement  of  the 
extension  of  bank  issues  and  bank  credits ;  he  also  briefly 
referred  to  the  need  of  protection  to  the  treasury. 

The  lively  opposition  to  the  circular  came  in  part  from 
speculators  and  in  part  from  people  who  desired  to  buy  for 
actual  settlement  but  who  could  borrow  only  notes  of  non- 
specie  paying  banks  and  hence  could  get  no  land  ;  on  the  other 
hand  the  measure  helped  speculators,  since  they  were  the  only 
ones  who  could  obtain  specie,  and  because  the  new  limitation 
of  sales  of  public  lands  practically  restricted  the  available  supply 
to  that  already  bought.  The  opposition,  however,  was  so  great 
that  on  the  assembling  of  Congress  both  Houses  passed  a  bill 
to  annul  the  circular ;  the  bill  was  delayed  until  the  end  of 
the  session,  and  as  the  president  did  not  sign  it  there  was  no 
opportunity  to  pass  it  over  his  veto  which  bore  the  date  of 
March  3,  1837,  11.45  r'- M- 

98.    Panic  of  1837  ;  Suspension  of  Specie  Payments. 

The  check  placed  upon  land  speculation  by  the  issue  of  the 
specie  circular  cramped  the  operations  of  Western  banks  and 
the  Eastern  institutions  which  were  closely  connected  with 
them  ;  coming,  moreover,  at  the  period  when  the  distribution 
of  the  surplus  was  to  begin,  the  specie  circular  was  tangled  up 
with  a  complicated  credit  system,  and  immediately  brought  on 
the  inevitable  crash.  The  first  of  the  four  instalments  for  de- 
posit with  the  States  was  called  January  i,  1837,  and  as  the 
amount  was  based  on  the  representation  of  the  several  States 
in  Congress  it  practically  meant  the  transfer  of  $9,000,000  from 
one  section  to  another,  for  a  large  part  of  the  government 
deposits  at  that  time  were  in  banks  in  the  less  populous  States. 
To  bring  about  these  readjustments  required  a  contraction 
of  loans  in  some  sections  in  order  to  release  the  government 
funds,  as  Schurz  in  his  life  of  Clay  describes  the  situation  : 
"  Millions  upon  millions  of  dollars  went  on  their  travels  North 
and  South,  East  and  West,  being  mere  freight  for  the  time  be- 
ing, while  the  business  from  which  the  money  was  withdrawn 


230       Panic  and  Restoration  of  Credit.      [§98 

gasped  for  breath  in  its  struggle  with  a  fearfully  stringent 
money  market."  The  first  instalment  was  practically  all  paid  ; 
the  second  instalment,  called  April  1,  was  coming  in.  when  on 
May  10,  1837,  the  banks  of  New  York  suspended  specie  pay- 
ments, and  on  the  next  day  they  were  followed  by  the  banks  in 
the  other  large  Northern  cities.  This  suspension  temporarily 
involved  the  government,  since  its  funds  were  in  the  custody 
of  the  banks. 

The  panic  which  overtook  this  country  was  by  no  means 
due  wholly  to  mistakes  in  the  country  itself.     In  November, 

1836,  the  failure  of  two  banks  in  Ireland  and  Manchester  was 
felt  on  the  London  Stock  Exchange  ;  the  three  large  business 
houses  known  as  the  three  W's,  —  Wilkes,  Wilde,  and  Wiggin, — 
which  had  closest  relations  in  the  granting  of  credit  to  America, 
were  in  particular  affected.  Since  the  imports  of  the  United 
States  at  this  time  largely  exceeded  the  exports  the  balance 
was  met  not  by  settlements  in  specie,  but  by  the  sale  of  Amei- 
ican  securities  of  one  sort  or  another  and  by  the  securing  of 
credits  abroad.  When  the  shock  was  first  felt  in  London 
English  creditors  found  it  necessary  to  call  in  their  loans. 
The  financial  depression  brought  on  an  immediate  fall  in  the 
price  of  cotton,  and  the  banks  in  New  Orleans  which  had 
made  large  loans  on  cotton  as  security  had  to  contract  their 
credits,  and  these  difficulties  in  turn  were  reflected  in  New 
York. 

Another  important   contributory  factor  leading  to  trouble 
was  the  failure  of  the  American  crops  in  the  years   1835   and 

1837,  unfortunately  continued  in  1838.  This  lessened  the 
purchasing  power  of  the  farmers  and  crippled  the  merchants. 
It  is  the  old  story :  in  the  confidence  of  getting  in  their 
payments  from  the  country  large  importers  had  given  time 
notes  to  settle  for  the  balance  of  trade,  thus  swelling  the 
volume  of  commercial  paper  and  over-stimulating  the  growth 
of  credit  institutions.  High  protectionists  have  also  placed 
emphasis  upon  the  lowering  of  duties  by  the  tariff  of  1833  as 
the  cause  of  the  subsequent  disasters. 


§99]  Distress  of  the  Treasury.  231 

All  of  the  causes,  however,  of  this  diseased  state  of  com- 
merce and  business  were  not  clearly  seen  at  the  time ;  people 
then  and  since  have  thought  the  whole  trouble  was  the  in- 
sistence of  the  government  in  demanding  payment  for  public 
lands  in  a  currency  which  would  hold  its  value.  At  a  meeting 
held  in  New  York  March,  1837,  to  consider  the  situation, 
Webster  publicly  expressed  this  opinion.  It  was  hoped  that 
the  new  president,  Van  Buren,  might  be  induced  to  rescind 
the  specie  circular,  and  immediately  after  the  delivery  of  Web- 
ster's speech  a  committee  was  appointed  to  go  to  Washington 
to  labor  with  the  president.  The  committee  had  a  dismal 
tale  to  tell :  the  value  of  real  estate  in  New  York  had  in  six 
months  depreciated  more  than  $40,000, 000 ;  in  two  months 
there  had  been  more  than  250  failures ;  there  had  been  a  de- 
cline of  §20,000,000  in  the  value  of  the  stocks  of  railroads  and 
canals  which  centred  in  New  York  ;  the  value  of  merchandise 
in  warehouses  had  fallen  30  per  cent. ;  and  within  a  few  weeks 
20,000  persons  had  been  discharged  by  their  employers.  The 
president  was  civil ;  or,  as  Benton  expresses  it,  treated  the 
gentlemen  with  exquisite  politeness  and  promised  them  an 
early  answer.  His  answer  proved  to  be  a  refusal  to  alter  the 
policy,  and  at  this  time  no  human  power  could  possibly  have 
averted  the  storm.  The  question  was  not  of  selling  govern- 
ment land  but  of  realizing  at  any  sacrifice  on  land  security  in  a 
time  of  depression  of  the  deadest  kind.  In  the  midst  of  this 
confusion  the  third  instalment  of  the  surplus  was  due  July  1, 
1837  ;  the  government  could  do  nothing  more  than  to  pay  to 
the  States  the  notes  received  from  the  banks  irrespective  of 
their  quality;  and  the  fourth  instalment,  due  October  1,  was 

never  paid. 

99.   Distress  of  the  Treasury. 

Further  details  of  the  general  crisis  of  1837  must  here  be 
omitted,  but  the  student  of  finance  is  particularly  interested  in 
the  measure  which  the  government  took  to  protect  its  funds. 
President  Van  Buren  would  not  yield  to  a  demand  to  rescind 
the   specie  circular,  on    the    ground    that    the  voters   of  the 


232       Panic  and  Restoration  of  Credit.     [{ 


99 


country  in  electing  him  president  had  passed  approvingly  on 
Jackson's  hard-money  policy;  he  placed  the  responsibility  on 
Congress,  and  called  an  extra  session  on  September  4  to  de- 
vise relief  for  the  treasury.  The  elaborate  message  which 
Van  Buren  sent  in  reviewed  the  situation,  briefly  advised  tem- 
porary measures  of  relief,  and  devoted  chief  attention  to  the 
necessity  of  establishing  an  independent  treasury  system 
through  which  the  government  might  in  the  future  care  for  its 
own  funds.  The  existing  disturbance  was  attributed  to  over- 
action  in  all  departments  of  business.  Stress  was  laid  upon, 
the  enormous  and  rapid  increase  in  banking  capital  and  paper 
circulation  between  1834  and  1836;  the  extension  of  credits 
to  traders  in  the  interior ;  the  large  investment  in  unproduc- 
tive lands;  the  expenditure  of  immense  sums  in  improve- 
ments which  had  proved  to  be  ruinously  improvident ;  and 
the  rapid  growth  of  luxurious  habits.  For  immediate  relief 
he  proposed  a  temporary  issue  of  treasury  notes,  and  the 
withholding  of  the  payment  of  the  fourth  instalment  of  the 
surplus,  due  in  October.  Upon  these  latter  recommendations 
Congress  acted  promptly  and  favorably ;  and  authority  was 
given  October  r  2  for  the  issue  of  treasury  notes  not  exceed- 
ing $10,000,000.  For  business  men  there  was  also  a  little 
comfort ;  importers  were  given  more  time  to  pay  their  duty 
bonds;  and  the  secretary  of  the  treasury  was  authorized  to 
withdraw  public  moneys  from  the  deposit  banks  in  a  manner 
as  gradual  and  convenient  to  these  institutions  as  might  be 
consistent  with  the  pecuniary  wants  of  the  government ;  no 
further  interest  was  to  be  demanded  on  the  deposits,  and  de- 
faulting banks  might  give  bonds  to  pay  in  instalments  the 
moneys  due  the  United  States.  On  January  1,  1840,  $896,000 
was  still  due  the  government  by  the  banks. 

Commercial  distress  was  deep-seated  and  recovery  was 
slow  ;  not  until  the  latter  half  of  1838  did  banks  generally  re- 
sume specie  payments  ;  even  then  some  of  the  banks  were 
unable  to  live  up  to  their  professions,  —  the  banks  of  Phila- 
delphia for  example  suspended  again  October  9,   1839,  and 


99] 


Distress  of  the  Treasury. 


233 


did  not  resume  effectively  until  March,  1842  ;  in  this  vacil- 
lating and  discouraging  policy  they  were  followed  by  many 
others,  particularly  in  Rhode  Island,  New  Jersey,  and  the 
South  and  West.  The  circulation  was  contracted  from  $149,- 
000,000  in  1837  to  $83,000,000  in  1842;  this  of  itself  low- 
ered prices,  deprived  some  section*  of  a  circulating  medium, 
and  contributed  to  commercial  distress.  These  misfortunes 
blighted  the  revenues  of  the  government ;  imports  declined 
from  $190,000,000  in  1836  to  $141,000,000  in  1837  and 
$113,000,000  in  1838;  customs  duties  fell  off  and  the  reve- 
nues from  sales  of  public  lands  shrank  to  their  earlier  figures ; 
as  is  shown  in  the  table,  page  246. 

Unfortunately  during  this  period  of  distress  the  treasury 
had  to  meet  increased  expenditures ;  the  extraordinary  gain 
in  the  revenue  during  the  years  1835  and  1836,  together  with 
the  extinction  of  the  debt,  tempted  Congress  to  large  outlays, 
from  some  of  which  the  government  could  not  immediately 
retreat.  The  construction  of  public  works,  the  more  zealous 
extinction  of  Indian  titles,  plans  for  a  speedy  removal  of  the 
aborigines  beyond  the  Mississippi,  improvements  of  the  Dis- 
trict of  Columbia,  and,  above  all,  the  expenses  in  the  Florida 
War,  raised  expenditures  of  the  government  in  1837  and  1838 
to  about  double  what  they  were  in  1834  and  1835.  The  diffi- 
culties were  aggravated  by  extravagance  and  corruption  in  ad- 
ministrative departments  in  which  high  officials  were  involved. 

The  result  of  all  this  was  a  series  of  annual  deficits  :  — 


Year 

Deficit 

Surplus 

1837 
1838 
1839 
1840 
1841 
,842 
18431 

$12,300,000 
7,500,000 

4,900,000 

q,  600,000 
5,200,000 
3,400,000 

$4,600,000 

Total 

$42,gOO,000 

$4,600,000 

»  Half  year. 


234       Panic  and  Restoration  of  Credit.    [§  100 

100.  Issue  of  Treasury  Notes  and  Loans. 

As  has  been  stated,  Congress  on  October  12,  1837,  in 
order  to  meet  the  immediate  strain,  issued  treasury  notes ; 
the  bills  authorized  were  limited  to  denominations  of  not  less 
than  $50 ;  they  were  redeemable  in  one  year,  bore  interest 
and  were  receivable  in  payment  of  all  debts  to  the  United 
States  including  payment  for  land.  The  expectation  that  a 
further  issue  would  not  be  necessary  was  disappointed  ;  and 
Congress,  ever  hoping  that  long-term  bonds  would  not  be 
needed,  yielded  to  a  policy  of  reissues,  from  which  it  did"  not 
free  itself  until  1844.  Between  1837  and  1843  treasury  notes 
were  issued  under  eight  different  acts,  amounting  to  $47,002,- 
900,  of  which  about  one-third  represents  reissues.  All  of  the 
notes  were  issued  at  par,  and  bore  interest  varying  from  one 
mill  per  cent,  to  6  per  cent. ;  the  limitation  of  denomina- 
tions to  $50  or  over  was  continued  in  subsequent  acts.  There 
was  strong  opposition  to  this  policy,  on  the  ground  that  the 
supply  of  monetary  medium  was  inadequate  to  the  needs  of 
commerce  ;  on  the  other  hand  Benton,  true  to  his  hard-money 
convictions,  endeavored  to  make  the  lowest  denomination  $100 
instead  of  $50.  In  the  issue  of  1843  a  much  controverted 
change  in  the  policy  of  redemption  was  introduced  by  the 
treasury  department ;  it  was  announced  that  the  one-year  notes 
would  be  purchased  by  the  treasury  at  par  on  presentation,  at 
any  time  before  the  expiration  of  their  term,  but  the  House 
committee  on  ways  and  means,  which  was  instructed  to  report 
upon  this  question,  held  that  the  system  made  the  notes  prac- 
tically demand  notes  and  was  contrary  to  the  Constitution.1 

When  the  Whigs  gained  control  in  1841  the  policy  of 
issuing  treasury  notes  was  supplemented  by  three  acts  for 
long-term  loans ;  although  no  one  of  these  was  highly  impor- 
tant in  itself  as  a  fiscal  measure,  they  contain  points  of  perma- 
nent financial  interest.     The  first  of  these  acts,  July  21,  1841, 

1  Report  No.  379,  28th  Cong.,  1st  Session,  House  of  Representatives. 


§  101]  Independent  Treasury.  235 

was  designed  to  fund  outstanding  treasury  notes,  and  to  meet 
current  needs  of  the  treasury.  The  loan  had  only  three  years 
to  run,  and  the  law  prohibited  the  sale  of  stock  at  less  than 
par;  although  the  rates  of  interest  offered  were  5%  to  6 
per  cent.,  capital  was  not  attracted  ;  of  the  $1 2,000,000  author- 
ized $5,672,976,  or  less  than  half,  was  issued.  An  attempt 
to  permit  the  sale  of  stock  at  the  highest  price  (which  might 
be  less  than  par)  also  failed,  as  this  was  regarded  as  a  reflec- 
tion upon  the  dignity  of  the  government. 

The  two  later  loans  of  April  15,  1842,  and  March  3,  1843, 
were  more  liberal  both  as  to  interest  and  term  of  maturity ; 
the  stock  could  be  sold  at  less  than  par  after  it  had  been 
advertised  a  reasonable  time ;  and  the  periods  of  redemption 
were  extended  to- 20  and  10  years  respectively;  of  the  loan  of 
1842,  $8,343,000  was  sold  at  from  97}^  to  par,  and  of  the  loan 
of  1843,  $7,004,000  was  marketed  at  a  premium.  In  neither 
case,  however,  was  the  yield  satisfactory  ;  capital  was  other- 
wise engaged  at  that  period,  and  American  financial  policy  did 
not  as  yet  command  general  confidence  ;  coupled  with  the 
tardy  recovery  from  the  disaster  of  1837  was  the  widespread 
suspicion  caused  by  repudiation  on  the  part  of  many  States 
and  cities. 

101.    Independent  Treasury. 

The  plan  which  Van  Buren  proposed  in  his  message  of 
September,  1837,  for  the  care  of  the  public  moneys  by  public 
officers  was  by  no  means  new ;  it  is  said  that  Jefferson  once 
suggested  to  Dallas  some  such  plan ;  Gouge,  an  office-holder 
at  Washington,  a  writer  on  money  and  banking,  is  also  one  of 
the  sponsors  for  the  system;  and  as  early  as  1834  a  bill  on 
somewhat  similar  lines  had  been  briefly  considered  in  Con- 
gress. In  the  message  of  September,  Van  Buren  argued  at 
length  that  it  was  not  designed  by  the  Constitution  that  the 
government  should  assume  the  management  of  domestic  or 
private  exchange  any  more  than  it  should  provide  for  the 
transportation  of  merchandise ;  that  the  previous  experiments 
in  the  employment  of  local  banks  for  the  care  of  government 


236       Panic  and  Restoration  of  Credit.    [§  101 

funds  had  proved  unsatisfactory;  that- the  early  practice  of 
employing  banks  was  a  measure  of  emergency  rather  than  of 
sound  policy ;  that  the  emergency  no  longer  existed,  for 
instead  of  a  load  of  national  debt  there  was  a  large  surplus 
which  the  government  should  adequately  protect.  Moreover, 
the  use  of  government  funds  by  banks  led  to  pernicious  results 
in  the  expansion  of  credit,  rashness  of  enterprise,  and  specu- 
lation ;  the  remedy,  therefore,  was  that  the  government  should 
take  care  of  its  own  funds,  and  return  to  the  practice  of 
requiring  the  payment  of  all  dues  in  specie  with  no  exception 
whatever  in  favor  of  bills  of  specie- paying  banks. 

A  bill  was  introduced  into  the  Senate,  September  14,  1837, 
for  the  establishment  of  an  independent  treasury,  but  it  ap- 
peared without  any  prohibition  on  the  treasury  to  receive  the 
bills  of  specie-paying  banks.  The  president  openly  objected, 
and  Calhoun  also  announced  that  he  could  not  support  the 
bill  unless  the  principle  of  specie  payment  was  included  ;  he 
moved  and  secured  in  the  Senate  an  amendment  which  was 
afterwards  known  as  the  specie  clause ;  in  this  form  the  bill 
passed  the  Senate  26  to  20,  but  failed  in  the  House  120  to 
106.  In  the  regular  session  of  1837-1838  the  measure  was 
reintroduced,  and,  although  the  specie  clause  was  stricken  out 
in  the  Senate  before  passage  by  that  body,  the  amended  bill 
could  not  command  a  majority  in  the  lower  house.  A  third 
time  at  the  next  session  1 838-1 839,  the  same  bill  was  brought 
forward  without  the  specie  clause,  and  for  a  third  time  failed. 
The  election  in  1838,  however,  changed  the  character  of  the 
twenty-sixth  Congress  and  resulted  in  the  election  of  a  major- 
ity in  favor  of  the  independent  treasury,  so  that  the  bill  was 
passed  and  approved  by  the  president  July  4,  1840.  A  com- 
promise was  accepted  as  to  payments  in  specie,  by  providing 
that  until  June  30,  1843,  a  part  of  all  sums  due  to  the  United 
States  might  be  paid  in  other  than  legal  currency ;  after  that 
date  only  gold  or  silver  was  to  be  receivable. 

The  arguments  against  the  measure  during  the  prolonged 
discussions  in  Van  Buren's  administration  were  not  especially 


§  102]  Tariff  of  1842.  237 

illuminating ;  political  rather  than  fiscal  and  commercial  con- 
siderations were  prominent ;  great  stress  was  laid  upon  the 
danger  of  a  government  bank,  managed  by  the  treasury 
department,  acting  under  the  commands  of  the  president  of 
the  United  States.  "  Public  funds,"  said  Clay,  "  would  be  un- 
safe in  the  hands  of  public  officers ;  the  perilous  union  of  the 
purse  and  the  sword  so  justly  dreaded  by  our  British  and 
Revolutionary  ancestors  would  become  absolute  and  complete  ; 
it  might  indeed  be  that  the  Senate  of  the  United  States  would 
be  obliged  humbly  to  implore  some  future  president  to  grant 
it  money  to  pay  the  wages  of  its  own  doorkeeper."  It  was  also 
urged  that  the  sub-treasury  system  would  subvert  all  the  State 
banks ;  would  embarrass  business  by  withdrawing  from  circu- 
lation large  sums  of  money ;  and  the  proposed  substitution  of 
a  purely  metallic  currency  would  reduce  all  property  in  value 
by  two-thirds.  Clay  denounced  the  policy  as  a  selfish  solici- 
tude for  the  government  and  an  evidence  of  a  cold  and  heart- 
less insensibility  to  the  sufferings  of  a  bleeding  people  !  A 
widespread  feeling  of  indignation  descended  on  the  administra- 
tion because  it  did  not  propose  to  encourage  local  banking 
institutions  by  the  deposit  of  government  funds;  and  the 
friends  of  a  United  States  Bank  once  more  championed  its 

cause. 

102.    Tariff  of  1842. 

The  serious  decrease  of  the  revenue  of  the  government 
caused  by  the  panic  of  1837  provided  a  favorable  opportunity 
for  the  protectionists ;  it  could  be  urged  that  the  tariff  duties 
were  not  only  too  low  to  afford  adequate  protection  to  busi- 
ness, but  that  they  would  not  produce  enough  to  support  a 
treasury  so  embarrassed  that  it  was  compelled  repeatedly  to 
find  relief  in  the  issue  of  treasury  notes.  The  claim  was  the 
more  convincing  in  1840  because  under  the  provisions  of  the 
compromise  tariff  further  reductions  were  to  take  place. 
Nevertheless  it  was  deemed  expedient  by  the  Whig  political 
managers  not  to  force  the  question  of  the  tariff  too  promi- 
nently before  the  people  in  the  presidential  campaign  of  1840  ; 


233       Panic  and  Restoration  of  Credit.    [§  102 

and  so  Harrison,  of  some  military  repute,  was  selected  by  the 
Whigs,  instead  of  Clay,  the  logical  candidate.  Harrison  was 
elected  and  the  Whigs  were  ready  with  a  program  both  as  to 
a  bank  and  the  tariff.  If  Harrison  had  lived  constructive 
legislation  would  have  been  quickly  effected  ;  Harrison  died 
within  a  month,  and  was  succeeded  by  Tyler,  who  had  been 
taken  by  the  Whigs  as  candidate  for  vice-president  without 
careful  consideration  of  his  views  on  economic  questions. 
Tyler  was  enough  of  a  Whig  to  favor  tariff  duties,  but 
obstinately  stood  aloof  from  his  party  in  the  settlement 
of  details. 

Notwithstanding  the  inadequacy  of  revenues  for  current 
expenditures,  the  Whigs  were  willing  to  sacrifice  the  income 
from  sales  of  public  lands  by  distribution  to  the  States,  a 
policy  which  would  fortify  the  future  contention  of  protection- 
ists that  high  duties  were  needed  to  keep  the  treasury  supplied, 
and  which  found  many  friends  among  those  who  wanted  the 
States  to  engage  in  costly  internal  improvements.  This  did 
not  satisfy  Tyler ;  and  in  order  to  secure  the  president's  ap- 
proval of  the  distribution  act  in  1841  the  party  leaders  were 
forced  to  include  in  the  law  a  proviso  that  if  at  any  time  the 
duties  under  the  compromise  tariff  were  raised  the  distribu- 
tion of  revenue  should  be  suspended.  In  this  way  the  non- 
tariff  party  hoped  to  tie  down  its  opponents  by  an  automatic 
check.  Such  a  restriction  was  highly  objectionable  to  the 
Whigs  under  Clay's  leadership,  and  in  two  tariff  bills  passed 
by  Congress  in  1842  the  proviso  for  suspending  distribution 
was  practically  disregarded.  Tyler  promptly  interposed  his 
vetoes  ;  and  not  until  a  third  bill  was  framed,  with  the  former 
provisos  as  to  land  distribution  left  undisturbed,  could  the 
new  tariff  obtain  the  president's  approval ;  this  was  brought 
about  August  30,  1842. 

The  tariff  act  of  1842  was  highly  protective;  duties  were 
increased,  but  not  uniformly,  to  the  level  of  the  tariff  of  1832  J 
the  average  on  dutiable  articles  was  23.1  per  cent,  in  1842, 
35.7    per  cent,  in   1843,  35-1  Per  cent,  in  1844,  and  32.5 


§  103]  Struggle  for  a  New  Bank.  239 

per  cent,  in  1845.  Specific  duties  wherever  practicable  were 
laid,  and  special  consideration  was  given  to  iron ;  on  some 
individual  commodities  the  rates  were  extremely  high,  as  is 
seen  in  the  following  list,  the  second  column  showing  the  ad 
valorem  incidence  of  taxation  based  on  prices  prevailing  in 
1844:  — 


Commodity 

Specific  duty 

Ad  valorem 
per  cent. 

4  cts.  per  sq.  yd. 

$25  per  ton 

$q  per  ton 

2%  cts.  per  lb. 

3   cts.  per  lb. 

z  to  6  cts.  per  sq.  yd. 

6  cts.  per  lb. 

4li  mills  per  lb. 

8  cts  per  bushel 

53 
77 
72 
5> 
43 
62  to  165 
100 

5« 
61 

Rolled  or  hammered  iron   .... 

Salt 

A  change  was  made  in  the  method  of  collecting  customs 
duties  as  had  been  earlier  contemplated  in  the  act  of  1833  ; 
hitherto  credit  had  been  granted  to  importers  upon  the  giving 
of  bonds  for  the  payment  of  duties  within  a  certain  period. 
When  capital  was  scarce  and  commercial  industry  not  highly 
organized,  as  in  the  early  part  of  the  century,  it  was  necessary 
for  the  government  to  be  liberal  in  its  treatment  of  importers ; 
with  the  increase  of  government  receipts,  and  the  growing  possi- 
bilities of  loss  through  fraud  or  incapacity  of  officials,  the  con- 
viction gained  ground  that  the  government  should  do  business 
on  a  cash  basis.  The  application  of  this  principle  to  the  pay- 
ment of  customs  duties  was  heartily  supported  by  protectionists, 
because  of  the  added  burden  which  would  be  placed  upon  the 
importing  interest.  The  merchants  opposed  the  change  and 
in  1846  secured  a  modification  through  the  establishment  of  a 
warehouse  system. 

103.   Struggle  for  a  New  Bank. 

The  new  system  of  an  independent  treasury  was  not  destined 
to  enjoy  a  long  existence ;  as  soon  as  the  Whigs  gained  power 
they  repealed  the  independent  treasury  law,  August  13,  1841, 


240       Panic  and  Restoration  of  Credit.    [§  103 

and  it  is  probable  that  if  Harrison  had  lived  a  third  United 
States  Bank  would  have  been  established.  Tyler,  really  a 
States- rights  Democrat,  and  not  in  harmony  with  his  party, 
in  this  as  on  the  tariff  proved  a  stumbling-block  to  constructive 
legislation.  The  opposition  complained  that  undue  haste  was 
shown  in  the  repeal :  Benton  asserted  that  experience  though 
brief  had  proved  the  sub-treasury  system  to  be  the  safest 
mode  yet  devised  for  collecting  the  revenues,  since  nothing 
but  gold  and  silver  were  received  ;  and  that  it  was  the  cheap- 
est way  of  keeping  the  moneys,  as  the  salaries  of  the  receivers 
were  less  than  the  cost  of  employing  banks.  The  Whigs, 
however,  were  prompt  to  gather  the  fruits  of  victory,  and  the 
new  system  was  summarily  set  aside. 

It  was  not  an  easy  matter  to  provide  a  substitute  ;  Clay 
and  some  other  of  the  leading  Whigs  knew  very  well  what 
they  wanted,  —  a  bank,  —  but  the  difficulty  was  to  arrange  a 
plan  which  would  meet  the  objections  of  Tyler,  who  was  known 
to  be  strict  in  his  interpretation  of  congressional  powers  as 
granted  by  the  Constitution.  In  the  hope  of  preventing  any 
future  embarrassment  from  this  source  Ewing,  the  secretary 
of  the  treasury,  was  called  upon  to  propose  a  plan,  and  it  was 
supposed  that  a  measure  framed  by  him  would  meet  with  the 
approval  of  the  president.  Ewing  recommended  the  estab- 
lishment of  a  fiscal  bank,  with  a  capital  of  $30,000,000,  to  be 
incorporated  in  the  District  of  Columbia ;  branches  to  be 
established  in  different  States,  but  only  with  the  assent  of  the 
States  concerned.  Tyler  had  objected  to  the  title  of  bank, 
and  also  questioned  the  right  of  Congress  to  grant  charters  to 
banking  corporations  without  the  permission  of  the  States. 
This  latter  restriction,  however,  was  particularly  objectionable  to 
Clay,  and  during  the  debate  an  amendment  was  inserted  that 
such  agreement  should  be  assumed  unless  dissent  were  ex- 
pressed by  the  legislature  of  the  State  concerned  at  its  next 
session.  The  contest  which  now  took  place  between  the 
president  and  the  Whig  majority  of  Congress,  from  this  time 
on  through  the  remainder  of  Tyler's  administration,  is  of  little 


§  103]  Struggle  for  a  New  Bank.  241 

interest  to  the  student  of  finance.  On  the  one  hand,  the 
president  showed  indecision  and  proved  obstinate  on  what 
would  appear  to  be  minor  points;  while  on  the  other  hand, 
Clay  and  his  immediate  followers  appeared  to  care  more  about 
discrediting  Tyler  than  about  getting  a  practical  bank. 

A  bill  was  passed  along  the  line  of  Clay's  amendments,  and 
on  August  16,  1 84 1,  was  vetoed  by  the  president  on  four 
grounds:  (1)  the  bill  provides  for  the  creation  of  a  bank  to 
operate  over  the  whole  Union,  and  is  therefore  unconstitu- 
tional;  (2)  it  is  a  bank  of  discount,  and  for  the  same  reason 
unconstitutional;  (3)  it  is  not  limited,  as  it  properly  should 
be,  to  the  power  of  dealing  in  exchange;  (4)  the  assent  of 
the  States  is  not  sufficiently  secured.  In  spite  of  the  party 
animosities  aroused  by  this  veto  which  the  Clay  Whigs  called 
treachery,  a  second  attempt  was  made  to  incorporate  a  bank- 
ing institution,  and  on  this  occasion  it  was  announced  that  the 
president's  scruples  would  be  recognized.  The  bank  was  to 
be  styled  the  "  Fiscal  Corporation  of  the  United  States."  By 
this  time,  however,  it  was  impossible  to  please  the  president. 
Lyon  G.  Tyler  thus  explains  and  defends  his  father's  position  : 
"  The  Fiscal  Corporation  had,  in  fact,  scarcely  more  than  a 
point  of  resemblance  to  the  idea  prominent  in  the  president's 
mind.  It  pretended  to  deal  exclusively  in  exchanges,  but  it 
justified,  in  fact,  the  most  obnoxious  system  of  discounts,  by 
prescribing  no  limit  to  the  premium  in  the  purchase  of  bills, 
or  to  the  time  the  bills  might  run,  or  to  their  renewability. 
It  rested  on  no  actual  exchange  basis ;  and  the  drawer  in  one 
place  might  become  the  acceptor  in  another,  and  vice  versa. 
A  bill  drawn  at  Philadelphia  on  Camden,  New  Jersey,  at  New 
York  on  a  border  town  in  New  Jersey,  at  Cincinnati  on  New- 
port in  Kentucky,  might,  for  anything  in  the  bill  to  restrain  it, 
become  a  mere  matter  of  local  accommodation.  The  bill 
copied  certain  essential  features  from  Clay's  edition  of  the 
Fiscal  Bank  bill.  The  secretary's  project  permitted  discount- 
ing *in  the  District,  and  on  principle  there  was  no  objection 
to  this.     But  Clay's  bill,  which  publicly  challenged  the  issue 

16 


242       Panic  and  Restoration  of  Credit.    [§  103 

of  power,  interdicted  all  discounting  in  the  District,  and  forced 
it  upon  the  States.     So  the  Fiscal  Corporation."  1 

The  second  bill,  on  September  9,  was  vetoed  like  the  first, 
and  for  substantially  the  same  reasons.  Benton  disposed  of 
it  by  declaring  that  it  would  be  better  to  "  call  this  corporosity 
the  Meal  Tub  Bank.  A  cattish  name  would  certainly  suit  it 
in  one  particular;  for,  like  a  cat,  it  has  many  lives.  This 
bank  has  been  killed  several  times,  but  here  it  is  still,  scratch- 
ing, biting,  and  clawing.  Jackson  killed  it  in  1832  ;  Tyler 
killed  it  last  week.  But  this  is  only  a  beginning ;  seven  times 
more  the  Fates  must  cut  the  threads  of  its  hydra  life  before 
it  will  yield  up  the  ghost." 

Tyler  in  his  annual  message,  December,  1841,  next  brought 
forward  a  plan  of  his  own.  He  recommended  a  Board  of 
Control  with  agencies  at  prominent  commercial  points  for  the 
safe-keeping  and  disbursement  of  the  public  moneys;  and  a 
substitution  at  the  option  of  the  public  creditor,  of  treasury 
notes  in  lieu  of  gold  and  silver,  provided  that  the  issue  of 
notes  be  limited  to  $15,000,000  unless  by  express  sanction  of 
Congress.  The  deposit  of  specie  to  a  limited  amount  was  to 
be  permitted  in  exchange  for  certificates  of  deposits ;  and  the 
institution  was  to  have  power  to  purchase  and  sell  domestic 
bills  and  drafts.  The  plan  as  a  whole  was  termed  the  Ex- 
chequer Bank.  According  to  Lyon  G.  Tyler  the  measure  had 
three  principal  objects  in  view  :  The  safe-keeping  of  the  gov- 
ernment moneys  ;  the  furnishing  a  paper  circulation,  always 
equivalent  to  gold  and  silver  and  of  universal  credit ;  and  a 
provision  for  supplying  to  some  extent  the  means  of  a  cheap  and 
safe  exchange  in  the  commerce  between  the  several  States  ;  and 
he  then  expounds  the  president's  plan  :  "  The  measure  avoided 
extremes  on  both  sides.  It  did  not  attempt  to  collect  a  capi- 
tal by  means  of  private  subscription  for  the  general  purposes 
of  loans  and  discounts,  and  therefore  did  not  propose  to  per- 
form the  ordinary  functions  of  a  bank.  On  the  other  hand, 
it  did  not  confine  the  currency  exclusively  to  a  specie  currency, 

1  Letters  and  Times  of  the  Tylers,  vol.  ii,  p.  87. 


§  104]  State  Repudiation.  243 

as  the  independent  treasury  did,  or  make  no  attempt  to 
furnish  the  country  with  facilities  of  exchange.  A  board  of 
control  in  the  city  of  Washington  and  agencies  in  the  States 
comprised  the  essential  features  of  the  system.  The  charge 
of  the  union  of  the  •  sword  and  purse,'  which  had  been  brought 
against  the  independent  treasury,  was  avoided  by  several  very 
ingenious  provisions.  The  president  was  forbidden  to  touch 
a  dollar  of  the  public  money,  by  his  own  authority,  or  change 
its  custody.  The  secretary  of  the  treasury  only  could  do  so, 
to  meet  the  occasion  of  the  public  service  or  by  a  public 
official  act.  .  .  .  And  finally,  under  rigorous  provisions  against 
discounting,  operations  in  exchange  were  permitted  to  give 
life  to  the  currency  and  facilities  to  the  public.  But  the 
sovereignty  of  the  States  was  especially  considered  in  that 
section  which  forbade  the  agencies  to  transact  any  business 
of  a  private  character  against  the  laws  of  the  States."  * 

This  plan  received  the  unqualified  endorsement  of  Webster, 
who  declared  that  "  if  the  Whig  Congress  will  take  the  meas- 
ure and  give  it  a  fair  trial  for  three  years  it  will  be  admitted 
by  the  whole  American  people  to  have  proved  the  most  bene- 
ficial institution  ever  established,  the  Constitution  only  ex- 
cepted." Congress,  however,  was  under  the  sway  of  political 
passions,  and  the  bill  was  defeated  almost  as  quickly  as 
introduced.  No  further  attempt  was  made  in  constructive 
legislation  until  the  Democrats  returned  to  power;  in  the 
meantime  State  banks  were  once  more  employed  as  deposi- 
tories, and  whenever  practicable  collateral  security  was  de- 
manded for  the  deposits  held  by  the  banks. 

104.    State  Repudiation. 

The  discredit  of  federal  finance  during  the  years  1837-1844 
was  sharpened  by  the  financial  collapse  of  several  of  the  State 
governments.  Encouraged  by  the  expansion  of  industry  and 
commercial  enterprise  which  was  witnessed  in  this  country 
during  the  first  half  of  the  century,  many  States,  particularly 

1  Letters  and  Times  of  the  Tylers,  vol.  ii,  pp.  132-133. 


244      Panic  and  Restoration  of  Credit.    [§  104 

in  the  North,  borrowed  money  to  invest  in  internal  improve- 
ments, such  as  railroads  and  canals,  which  would  aid  in  de- 
veloping their  resources ;  in  the  South,  and  in  a  less  degree 
the  West,  States  borrowed  largely  in  order  to  engage  in  State 
banking  schemes,  and  in  the  West  States  borrowed  for  com- 
mercial enterprises.  These  undertakings  in  many  cases  proved 
either  unremunerative  or  too  expensive  for  the  State  to  carry ; 
and  in  some  of  the  newer  commonwealths  particularly  there 
was  not  an  honest  determination,  even  where  there  was  the 
ability,  to  meet  the  maturing  obligations  of  interest  and  prin- 
cipal. 

Mississippi  for  example  in  1838  invested  $5,000,000  in  a 
banking  institution  which  through  a  combination  of  bad  man- 
agement and  general  business  confusion  ran  through  its  assets  ; 
the  governor  of  Mississippi,  taking  advantage  of  irregularities 
in  the  issue  of  the  bonds  by  the  legislature,  recommended 
that  they  be  repudiated,  and  on  this  issue  a  repudiative  legis- 
lature was  elected  and  endorsed  the  executive.  Florida  also 
sold  territorial  bonds  for  investment  in  a  bank,  and  when  the 
inability  of  this  institution  to  pay  interest  became  apparent  it 
also  disclaimed  its  obligations  for  technical  reasons. 

In  several  of  the  Northern  States  —  Pennsylvania,  Maryland, 
Michigan,  Indiana,  and  Illinois  —  the  financial  strains  were 
great,  and  fears  for  a  time  were  expressed  that  State  honor 
might  be  stained.  The  evils  were  intensified  by  the  fact  that 
foreigners  had  invested  liberally  in  the  securities  which  were 
now  disowned,  and  it  was  extremely  difficult  for  this  class  of 
investors  to  understand  either  their  own  legal  rights  or  the 
constitutional  position  of  the  States  repudiating  or  delaying. 
It  could  hardly  be  expected  that  they  would  discriminate  be- 
tween States,  or  would  consider  them  as  equal  sovereigns  in  a 
federal  union,  not  to  be  reached  by  the  ordinary  processes  of 
law.  They  were  consequently  dismayed  and  angered  to  find 
that  the  national  government  had  no  power  over  the  defaulting 
members.  Originally,  under  Art.  3,  Sect.  1,  of  the  Constitu- 
tion, the  judicial  power  of  the  United  States  was  given  power 


§  104]  State  Repudiation.  245 

in  controversies  between  a  State  and  citizens  of  another  State, 
or  between  a  State  or  the  citizens  thereof  and  foreign  States, 
citizens,  or  subjects.  In  1793,  when  the  State  of  Georgia  was 
brought  into  court  by  a  citizen  of  another  State,  an  agitation 
was  promptly  begun  for  an  amendment  of  the  Constitution 
in  order  to  maintain  the  dignity  of  sovereign  States.  The 
result  was  the  Eleventh  Amendment,  which  reads,  "The 
judicial  power  of  the  United  States  shall  not  be  construed  to 
extend  to  any  suit  in  law  or  equity,  commenced  or  prosecuted 
against  one  of  the  United  States  by  citizens  of  another  State, 
or  by  citizens  or  subjects  of  any  foreign  State." 

In  view  of  another  clause  in  the  Constitution,  which  forbids 
States  to  violate  contracts  into  which  they  have  entered,  the 
position  of  constitutional  law  towards  State  contracts  is  ex- 
tremely unsatisfactory.  The  State  is  forbidden  to  commit  a 
wrong,  but  if  it  commit  one  no  remedy  is  afforded.  Not 
only  did  foreigners  regard  this  situation  as  absurd  and  unjust, 
but  many  Americans  shared  in  this  opinion.  It  was  conse- 
quently proposed  in  a  report  submitted  to  Congress  in  March, 
1843,  that  the  federal  government  should  assume  the  debts  of 
the  States ;  it  was  plausibly  argued  that  the  greater  part  of  the 
indebtedness  had  been  contracted  in  aid  of  public  works  which 
were  "  calculated  to  strengthen  the  bonds  of  union,  multiply 
the  avenues  of  commerce,  and  augment  the  defences  against 
foreign  aggression."  Although  the  measure  was  supported  by 
high  authority  both  from  the  standpoint  of  justice  and  of  ex- 
pediency, it  was  defeated.  To  this  day  the  individual  creditor 
is  helpless  except  in  certain  cases  where  he  may  be  able  to 
bring  suit  against  State  officials.  A  few  States,  to  their  credit, 
have  provided  in  their  own  law  remedies  against  themselves  in 
cases  of  repudiation.  But  because  of  open  repudiation  by 
some  of  the  States,  temporary  difficulties  of  others,  coupled 
with  the  insolvency  of  many  large  enterprises  in  which  foreign- 
ers had  invested,  American  credit  about  1840  suffered  greatly. 
It  almost  became  a  by-word  of  reproach  during  the  next  dec- 
ade, and  it  was  exceedingly  fortunate  that  during  this  period 


246      Panic  and  Restoration  of  Credit.     [§  105 

the  country  was  so  prosperous  that  it  was  not  obliged  to  in- 
vite new  supplies  of  foreign  capital. 


105.    Receipts  and  Expenditures,  1834-1846. 

The  effect  of  the  tariff  of  1842  was  at  first  disappointing 
from  a  revenue  standpoint ;  in  the  second  year  there  was  an 
improvement ;  and  in  1844  the  yield  amounted  to  $26,000,000, 
a  sum  greater  than  had  been  received  from  this  source  in  any 
one  year  since  1833.  By  years  the  ordinary  receipts  from  all 
sources  from  1834  to  1846  were  as  follows  :  — 


Year 

Customs 

Public  lands 

Miscellaneous 

Total 

•834 

$16,214,000 

$4,857,000 

$720,000 

$ai,7gi,ooo 

•835 

19,391,000 

14.757,000 

1,282,000 

35,430,000 

1836 

23,409,000 

24,877,000 

2,540,000 

50,826,000 

1837 

11,169,000 

6,776,000 

7,009,000 

24,954,000 

1838 

16,158,000 

3,730,000 

6,414,000 

26,302,000 

•839 

23,137,000 

7,361,000 

984,000 

31,482,000 

1840 

'3,499.ooo 

3,41 1,000 

2,570,000 

19,480,000 

1841 

14,487,000 

1,365,000 

1 ,008,000 

16.860,000 

1842 

18,187,000 

'.335.000 

454,000 

19,976,000 

'843' 

7,046,000' 

'  898,000' 

287,000* 

8,231,000' 

1844 

26,183,000 

2,059,000 

1,078,000 

29,320,000 

•845 

27,528,000 

2,077,000 

365,000 

29,970,000 

1846 

26,712,000 

2,694,000 

293,000 

29,699,000 

1  Half  year. 


Expenditures  during  this  period  were  as  follows  : 


Year 

War 

Navy 

Indians 

Pensions 

Interest 
on  debt 

Miscel- 
laneous 

Total 

•833 

$6,704,000 

$3,901,000 

$1,802,000 

$4,589,000 

$303,000 

$5,716,000 

$23,018,000 

•834 

5,696,000 

3,956,000 

1,003,000 

3,364,000 

202,000 

4,404,000 

18,627.000 

<83S 

5,759,000 

3,864,000 

1,706,000 

1 ,954,000 

57,000 

4,229,000 

i7,573»ooo 

1836 

11,747,000 

5,807,000 

5,037,000 

2,8S2,000 

5,393,000 

30,868,000 

1837 

13,682,000 

6,646,000 

4,348,000 

2,672,000 

9,89^,000 

37,244,000 

1838 

12,897,000 

6,131,000 

5,504,000 

2,156,000 

14,000 

7,160,000 

33,865,000 

'839 

8,916,000 

6,182,000 

2,528,000 

3,142,000 

399,000 

5,725,000 

26,896,000 

1840 

7,095,000 

6,113,000 

2,331,000 

2,603,000 

174,000 

5,995,000 

24.314,000 

.841 

8,801,000 

6.001,000 

2,514,000 

2,388,000 

284,000 

6,490,000 

26,482,000 

1842 

6,610,000 

8,397,000 

1,199,000 

1,378,000 

773,000 

6,775,000 

25,135,000 

18431 

2,908,000' 

3,727,000' 

578,000' 

839,000' 

523,000' 

3,202,000' 

11,780,000' 

1844 

5,218,000 

6,498,000 

1,256,000 

2,032,000 

1,833,000 

5,645,000 

22,484,000 

'845 

5,746,000 

6,297,000 

1,539,000 

2.400,000 

1 ,040,000 

5,911,000 

22,954,000 

1846 

10,413,000 

6,455,000 

1,027,000 

1,811,000 

842,000 

6,71 1,000 

27,261,000 

'  Half  year. 


INDIANS 


$35,000000 
30,000000 
25,000000 
20,000000 
15,000000 
10,000030 
5,000000 
0 


WAR                                     / 

y\ 

rrT>    r-/l 

^ 

1  !    vfT  i 

$15,000000 
10,000000 
5,000000 
0 


NAVY 

— r^1\  T—i — fT" 

rT~ 

1  1 

li  yT T 1 

$5,000000  f- 
0 


INTEREST 


=gcd 


$5,000000  h 
0 


PENSIONS 


$30,000000 
25,000000  l- 
20,000000 
15,000000 
10,000000 
5,000000 
0 


- 

MISCELLANEOUS 

A 

>^-r- 

L 

:£ 

rVT 

1836  37  38  39  40  41  42  43  44  45  46  47  48  49  50  51  52  53  54  55  56  57  58  59  60  61 


No.  III.  — ORDINARY   EXPENDITURES,    1836-1861. 

(Continuation  of  Chart  No.  2,  different  scale.) 


§  105]  Receipts  and  Expenditures. 


247 


Reference  has  already  been  made  to  some  of  the  causes  re- 
sponsible for  increased  expenditures  in  the  years  1 837-1 838, 
but  in  addition  the  higher  level  of  "  miscellaneous  "  expenditures 
requires  some  explanation  :  the  area  of  territory  to  receive  the 
enjoyment  of  civil  administration  was  being  rapidly  extended 
on  account  of  the  settlements  in  the  West ;  new  courts  were 
established,  and  the  judiciary  was  treated  with  more  generosity 
by  an  increase  in  salary  ;  reductions  in  the  tariff  made  it  neces- 
sary to  increase  the  compensation  of  certain  officers  as  an 
offset  for  loss  of  fees  ;  there  was  an  active  construction  of 
light-houses,  custom-houses,  and  branch  mints  ;  and  new  roads 
were  opened  to  the  tenitories. 

A  comparison  of  receipts  and  expenditures  is  made  in  the 
following  table  in  millions  of  dollars  :  — 


Year 

Receipts 

Expendi- 
tures 

Surplus 

Deficit 

Taxes 

Other 

Total 

1834 

183s 

1836 

1837 

1838 

•  839 

1840 

1841 

1842 

18431 

1844 

1845 

1846 

16.2 
•9-3 
23-4 
ii.i 
16. 1 
23-« 
>3-4 
•4-4 
18. 1 
7.0 

•6.1 

27-5 

26.7 

S 

16 
27 
13 
10 
8 
6 
2 

3 

2 
2 

5 

4 
8 
2 
3 
0 
4 
8 
2 
2 
4 
9 

21.7 

35-4 
50.8 
24.9 
26.3 
31-4 
19.4 
16.8 
19.9 
8.2 
29-3 
29.9 
29.6 

18.6 
■7-S 
30.8 
37-2 
3*8 
26.8 
24-3 
26.4 
25.1 
1 1.7 
22.4 
22.9 
27.2 

3' 
17.9 

20.0 

4-6 

6.9 

7- 

2-4 

"2-3 

7-5 

4-9 
9.6 

5-2 

3-5 

1   Half  year,  January  i  to  June  30,  1843. 


CHAPTER  XI. 

TARIFF,  INDEPENDENT  TREASURY,  AND   STATE   BANKS. 

1846-1860. 

106.    References. 

Bibliographies:  Bogart  and  Rawles,  41-42;  Channing  and  Hart, 
388-389. 

Tariff:  Messages  and  Papers,  IV,  403-406  (1845),  498-502,  647  (1846) ; 
V,  83-85  (1850),  123-126  (1851);  Finance  Reports,  V,  4-16  (1845);  VL 
6-14  (1846),  138-142  (1847),  283-291  (1848),  345  (report  on  warehousing 
system);  1853-1854,  pp.  9-1 1  ;  1854—1855,  pp.  12-16;  1S56-1857,  pp.  13- 
16;  Benton's  Abridgment,  XV,  97-140,565-631  ;  Statutes,  IX,  42  (1846),  55 
(warehouse  act,  1846);  XI,  192;  State  Papers  and  Speeches  on  the  Tariff 
(Taussig  ed.),  214-251  (Walker's  report);  E.  Young,  Customs  Tariff 
Legislation,  xmi  (1846),  cvi  (1857),  cxiv  (1861);  D.  Webster,  Works,  V, 
161-243:  Sherman's  Speeches,  1-12  (Morrill  tariff);  Holies,  11,449-461 
(1846) ;  478-485  (warehouse  system) ;  F.  W.  Taussig,  History  of  the  Tariff, 
1 14-154;  J.  G.  Blaine,  Twenty  Years,  I,  192-207;  J.  F.  Rhodes,  History 
of  the  U.  S.,  Ill,  28-59;  Schouler,  IV,  515-517:  Stanwood,  II,  60-8-?. 

Independent  Treasury:  Messages  and  Papers,  IV,  406-408  (1845), 
502  (1846),  556,  648-649(1848);  Finance  Reports,  V,  17-21  (1846);  VI, 
6-8,  31-49  (regulations),  129-132  (1847);  1852-1853,  pp.  14-15;  1S53— 
1854, pp.  16;  255-275  (report  by  Gouge);  1856-1857,  pp.  21-23;  Benton's 
Abridgment,  XV,  442-450,  631-636;  Statutes,  IX,  59;  or  Dunbar,  138; 
W.  MacDonald,  Select  Documents,  358-365 ;  D.  Kinley,  Independent 
Treasury,  40-65 ;  J.  B.  Phillips,  Methods  of  A'eeping  the  Public  Money, 
1 17-130;  Holies,  II,  352-358;  Bankers'  Magazine,  IX,  625;  X,  609; 
T.  H.  Benton,  Thirty  Years,  II,  726. 

Finances  of  the  Mexican  War  :  Messages  and  Papers,  IV,  524- 
529»  553-556;  Finance  Reports,  1846-1848;  Statutes,  IX,  118,  217;  Dun- 
bar, 137,  142-148;  Bayley,  364-367,  437;  Bolles,  II,  590-595;  J.  J. 
Knox,   United  States  Arotes,  63-69. 

Crisis  of  1857  :  Messages  and  Pa per j,V ',520;  Bayley,  368  ;  D.  Kinley, 
The  Independent  Treasury,  176-180  ;  W.  G.  Sumner,  History  of  American 
Currency,  180-187  ;  C.  A.  Conant,  History  of  Modern  Banking,  492-497  ; 
H.  von  Hoist,  Constitutional  History  of  the  U.  S.,  1856-1859,  97-125; 
J.  J.  Knox,  United  States  A'otes,  70-76;  Bolles,  II,  599-602;  Schouler, 
Y,  419-420;  C.  F.  Dunbar,  Economic  Essays,  266-293. 

248 


§  i°7]  Tariff  of  i  846.  249 

State  Banking:  Messages  and  Papers,  V,  437-441  (1857);  Finance 
Reports,  1854-1855,  pp.  22-23;  I855-l856.  PP  29-3i ;  W.  G.  Sumner,  His- 
tory of  Banking  in  the  U.  S.;  C.  A.  Conant,  History  of  Modern  Banking, 
j'O-347;  H.  White,  313-398;  C.  J.  Bullock,  Monetary  History,  82-93; 
L.  C.  Root,  N.  Y.  Bank  Currency,  in  Sound  Currency,  II,  No.  5;  AT.  E. 
Bank  Currency,  ditto,  II,  No.  13;  C.  F.  Dunbar,  Economic  Essays, 
3I4-329- 

Expenditures:  Messages  and  Papers,  V,  488-490  (1858),  524,  648 
(i860);  Bolles,  II,  576-609. 

107.    Tariff  of  1846. 

The  tariff  of  1842  would  have  been  more  hotly  contested 
had  there  not  been  a  necessity  for  additional  revenue.  By  1844 
good  times  had  come  again,  and  the  tariff  for  the  first  time  be- 
came a  distinct  party  question,  agitated  in  national  conventions, 
set  forth  in  platforms  and  made  a  feature  in  campaigns.  Never- 
theless in  the  contest  of  1844  each  of  the  parties  was  cautious 
and  even  ambiguous.  The  Democrats  asserted  that  no  one 
branch  of  industry  should  be  fostered  to  the  detriment  of  others, 
a  doctrine  which  no  Whig  would  deny  ;  while  the  Whigs  declared 
in  favor  of  a  tariff  for  revenue,  discriminating  with  reference 
to  protection,  a  doctrine  which  in  the  past  had  found  general 
acceptance  among  Democrats.  The  Democratic  ticket  was 
aided  by  the  selection  of  Dallas  as  candidate  for  the  vice- 
presidency  from  protectionist  Pennsylvania ;  and  Polk,  the 
head  of  the  ticket,  wrote  a  letter  during  the  campaign  in  which 
he  said  :  "  I  have  heretofore  sanctioned  such  honest  discrimat- 
ing  duties  as  would  produce  the  amount  of  revenue  needed,  and 
at  the  same  time  afford  reasonable  incidental  protection  merely, 
and  not  for  revenue."  Such  hazy  utterances  helped  to  obscure 
the  issue  and  to  darken  the  mind  of  the  average  voter  as  to  the 
real  opinions  or  intentions  of  the  party  leaders ;  and,  although 
Democratic  success  was  not  primarily  due  to  their  tariff  policy 
when  they  once  more  entered  into  power  in  1845  they  quickly 
attacked  existing  statutes.  The  financial  situation  was  on  the 
whole  favorable  for  a  radical  experiment,  since  there  was  an 
excess  of  receipts  in  the  treasury  for  1845  and  a  further  excess 
seemed  likely  in  1846.     Robert  J.  Walker,  secretary  of  the 


25° 


Tariff  and  State  Banks. 


[§<°7 


treasury  appointed  by  President  Polk,  was  an  able  man  with 
positive  convictions  in  regard  to  a  revenue  policy.  He  had 
worked  out  a  theory  of  import  duties  which  he  promptly  laid 
before  Congress  in  December,  1845.  His  system  embraced 
the  following  principles  :  — 

1.  No  more  money  shall  be  collected  than  is  necessary  for 
the  wants   of  the   government   economically   administered. 

2.  No  duty  shall  be  imposed  on  any  article  above  the  lowest 
rate  which  will  yield  the  largest  amount  of  revenue. 

3.  Below  such  rate  discrimination  may  be  made  descending  in 
the  scale  of  duties ;  or  for  imperative  reasons  the  article 
may  be  placed  in  the  free  list. 

4.  The  maximum  duty  shall  be  imposed  on  luxuries. 

5.  All  minimums  and  all  specific  duties  shall  be  abolished  and 
ad  valorem  duties  substituted. 

6.  The  duties  shall  be  so  imposed  as  to  operate  as  equally  as 
possible  throughout  the  Union. 

Congress  accepted  nearly  all  of  the  plan  but  in  one  important 
particular  fell  short :  no  duties  were  placed  on  tea  and  coffee. 
These  taxes  had  been  dropped  in  1832,  and  Congress  did  not 
dare  in  times  of  prosperity  to  risk  popular  disapproval  and  retax 
articles  of  such  general  use.  By  this  omission  an  annual 
yield  of  $3,000,000  was  lost,  and  Secretary  Walker  during 
the  remainder  of  his  term  of  office  did  his  best  to  impress 
upon  Congress  the  need  of  adopting  his  recommendation. 

The  vote  in  the  House  of  Representatives  by  geographical 
sections  on  this  tariff  was  as  follows  :  — 


States 

In  favor 

Opposed 

New  England  .     .     . 
Middle  States  .     .     . 
West  and   Northwest 
South  and  Southwest 

9 
18 
29 

58 

'9 
44 
10 

20 

114 

93 

Under  the  tariff  act  of  July  30,  1 846,  articles  of  import  were 
divided  into  various  schedules  designated  by  letters  of  the 
alphabet  as  follows  :  — 


§  J°7]  Tariff  of  1846.  251 

(A)  Included  brandy,  spirits,  etc.,  rate  100%. 

(B)  Included  spices,  preserved  fruits  and  meats,  cigars,  snuff, 

and  manufactured  tobacco,  rate  40%. 
(C),  (D),  (E),  and  (F)  Included  the  great  bulk  of  commercial 
products,  which  were  taxed  30%,  25%,  20%,  and  15% 
respectively. 

(G)      Included  books,  building  stone,  diamonds,  watches,  rate  10  %. 

(H)  Included  various  articles  manufactured  or  in  a  low  state 
of  manufacture  and  used  in  existing  industries,  rate  5  %. 
(I)  Included  coffee  and  tea,  copper  ore,  and  a  few  other  com- 
modities, free  from  duty. 


Aside  from  the  free-trade  basis  of  the  tariff  of  1846,  or 
Walker  tariff  as  it  is  frequently  called,  it  is  remarkable  in  its 
brevity, —  less  than  5000  words,  —  in  its  comprehensiveness, 
and  in  its  condensation.  It  is  also  notable  as  the  only  tariff 
practically  drafted  by  the  executive.  In  spite  of  its  free  trade 
intent,  protectionist  principles  appear  in  some  sections ;  wool 
was  taxed  though  a  raw  material,  while  coffee  and  tea  were  left 
free.  Another  feature  of  this  tariff  was  the  change  from  specific 
to  ad  valorem  duties;  it  will  be  recalled  that  until  1816  both 
methods  were  in  use,  and  there  was  no  insistence  upon  either 
to  the  exclusion  of  the  other  ;  after  1 8 1 6  the  tendency  was  on  the 
whole  toward  the  substitution  of  specific  duties  wherever  practi- 
cable, and  by  1846  the  reversal  was  complete.  Theoretically 
the  system  is  ideal ;  in  practice  it  admits  of  grave  injustice,  and 
when  a  Whig  secretary  of  the  treasury,  William  E.  Meredith, 
came  into  office  in  1849  he  easily  secured  testimony  in  regard 
to  the  inequalities  of  appraisement  of  goods  at  different  ports 
and  frauds  from  undervaluation  :  for  example,  the  collector  of 
customs  at  Boston  complained  that  cord-wood  from  the  prov- 
inces was  entered  at  Boston  at  $1.50  per  cord,  at  Gloucester 
Si. 25  per  cord,  and  at  Portland  and  Bath  $.75  ;  and  from 
New  York  came  the  story  that  when  three  parcels  of  cotton 
goods  were  sent  as  a  test  to  as  many  different  ports  and  entered 
by  appraisement  without  invoices,  the  result  was  a  difference  of 
25  per  cent,  between  the  highest  and  the  lowest  valuation. 


252 


Tariff  and  State  Banks. 


[§108 


The  method  of  appraisement  of  goods  was  also  changed  by 
the  act  of  1846,  and  defined  more  precisely  by  an  emendation 
of  March  3,  185 1  ;  this  provided  that  the  valuation  be  based 
on  the  actual  market  value  or  wholesale  price  at  the  time  of 
exportation  to  the  United  States,  and  that  to  this  value  be 
added  the  cost  of  the  packing  or  covering,  the  commission  of  the 
broker  who  sold  the  goods,  the  export  duties  if  there  were  any, 
wharf  dues,  and  the  cost  of  putting  goods  on  board.  » 

A  further  novelty  for  this  country  in  customs  administration 
was  the  establishment  of  a  convenient  system  of  government 
warehouses  in  which  goods  might  lie  with  duty  unpaid  under 
the  custody  of  the  government  for  a  certain  length  of  time. 
In  this  way  merchandise  could  be  imported,  landed,  packed, 
repacked,  assorted,  and  re-exported  without  so  large  an  outlay 
of  mercantile  capital  as  would  be  necessary  by  prepayment  of 
duties.  The  system  quickly  justified  itself  and  has  continued 
until  the  present  time. 

The  average  rates  of  duty  on  dutiable  imports  under  the 
tariff  of  1846  were  as  follows  :  — 


Year 

Per  cent. 

Year 

Per  cent. 

1846 

26.5 

1852 

26. 

1847 

22.5 

■»S3 

25. 

1848 

24- 

1854 

23-5 

.849 

23- 

•  855 

23- 

1850 

25.2 

1856 

25- 

1851 

26 

108.    The  Independent  Treasury  Re-established. 

The  second  important  change  carried  through  by  the  Demo- 
xrats  was  the  re-establishment  of  the  sub-treasury  system.  In 
the  long  debate  which  took  place  few  new  arguments  were 
added  to  those  heard  in  the  previous  discussions  of  1837- 
40.  Again  one  side  insisted  that  it  was  unsafe  and  uncon- 
stitutional for  the  government  to  "  keep  "  its  funds  in  the  local 
banks,  and  again  the  other  side  emphasized  the  services 
rendered  by  the  banks  to  the  government.     The  measure  as 


§  108]         The  Independent  Treasury.  253 

enacted  in  August,  1846,  was  so  similar  to  that  of  1840  as  not 
to  require  further  description ;  treasury  notes,  however,  were 
added  to  gold  and  silver  as  receivable  for  public  dues,  and 
provision  was  made  for  the  supply  of  vaults  and  safes  in  the 
new  treasury  building  at  Washington  and  at  the  mints  and 
custom-houses ;  New  York,  Philadelphia,  Washington,  Charles- 
town,  New  Orleans,  and  St.  Louis  were  the  principal  centres 
of  deposit ;  four  receivers-general  and  two  keepers  of  mints, 
with  the  treasurer  of  the  United  States,  were  appointed  public 
custodians.  The  new  system  began  its  career  under  difficul- 
ties ;  the  opposition  of  the  banks  had  to  be  faced,  and  no  ap- 
propriations were  voted  for  some  of  the  offices  created  by 
the  act.  Inadequate  provision  was  made  for  the  care  of  funds 
of  disbursing  officers  who  were  distributed  throughout  the 
country,  and  abuses  arose  because  these  officials  sometimes 
kept  public  moneys  or  loaned  them  to  their  own  profit. 
James  Guthrie,  who  became  secretary  in  1853,  remedied 
this  by  increasing  the  number  of  depositories  and  also  by 
ordering  that  disbursing  agents  could  pay  through  treasury 
drafts.  The  sub-treasury  system  appears  to  have  been  useful 
from  the  beginning  and  deserves  credit  for  some  of  the  success 
of  the  financiering  during  the  Mexican  War,  but  to  what  extent 
it  was  responsible  for  the  prosperity  of  the  national  finances 
during  the  succeeding  years  it  is  hard  to  determine,  for  several 
commercial  factors  turned  out  favorable  to  the  United  States, 
as  for  example  the  heavy  imports  of  specie  in  1847  and  the 
large  production  of  gold  after  the  Californian  discoveries  in 
1848. 

A  careful  personal  examination  of  the  several  sub-treasuries 
and  government  depositories  was  made  in  1855  by  William  M. 
Gouge;  and  he  reported  that  in  the  twenty-three  government 
depositories  there  was  at  the  time  one-half  as  much  gold  and 
silver  as  was  held  by  the  1300  banksj  and  in  some  of  them  the 
safeguards  against  fire,  thieves,  and  burglars  were  inferior  to 
those  provided  by  banks ;  still  the  only  loss  by  robbery  up  to 
that  time  had  been  $10,000  at  Pittsburgh.     The  accounts  of 


254  Tariff  and  State  Banks.  [§  108 

the  depositories  he  found  accurate  and  uniform  according  to 
law,  though  there  was  some  neglect  as  to  official  examination. 
The  transfer  of  public  funds  from  one  place  to  another  under 
the  system  was  not  so  successful  as  had  been  hoped,  because 
in  some  sections  little  specie  was  in  circulation.  With  due 
allowance  for  these  short-comings  Gouge  summed  up  the  ad- 
vantages of  the  system  as  follows  :  It  created  a  new  demand 
for  specie ;  it  limited  the  expansion  of  bank  paper  money ;  it 
avoided  the  derangement  of  business  resulting  from  govern- 
ment association  with  banks ;  it  prevented  losses  to  the 
government ;  and  it  gave  to  the  treasury  a  constant  control  of 
its  funds.  The  advantage  of  this  was  seen  in  the  panic  of 
1857,  when  the  national  government  was  able  to  meet  every 
liability  without  embarrassment,  while  state  governments  with 
nominally  filled  treasuries  were  unable  to  pay  their  debts 
except  in  the  depreciated  currency  of  banks  or  by  calling 
upon  banks  for  specie  through  the  redemption  of  notes,  —  a 
strain  which  simply  added  to  the  distress. 

The  real  trial  of  the  independent  treasury  system  and  its 
permanent  effect  on  business  and  commercial  crises  could  not 
be  seen  until  after  the  Civil  War;  but  in  1853  the  accumula- 
tion of  surplus  funds  in  the  treasury  caused  apprehension  in 
commercial  and  financial  circles.  Relief  was  at  the  time 
afforded  by  the  purchase  of  silver  for  new  coinage  authorized 
under  the  act  of  1853  and  also  by  the  purchase  of  government 
stock.  Even  Secretary  Guthrie,  a  most  ardent  defender  of  the 
independent  treasury,  or,  as  he  termed  it,  "  the  constitutional 
treasury,"  admitted  that  the  system  might  exercise  a  fatal 
control  over  the  currency,  banks,  and  trade  by  causing  a  strin- 
gency in  the  money  market  whenever  receipts  exceeded  ex- 
penditures. The  problem  was  simply  an  added  argument  for 
a  more  careful  adjustment  of  revenue  to  expenditures.  The 
good  effects  of  the  independent  treasury  system  in  the  earlier 
part  of  its  history  do  not  necessarily  prove  its  advantage 
under  conditions  widely  different  from  those  of  a  half  cen- 
tury ago.     If  local  banking  had  been  wisely  carried  on  during 


§  109]      Finances  of  the  Mexican  War.        255 

the  first  half  of  the  nineteenth  century  it  is  not  likely  that 
the  government  would  have  undertaken  or  would  have  been 
intrusted  with  the  varied  and  heavy  responsibilities  which  it 
now  bears.  To  escape  the  abuses  and  the  disasters  of  ill-regu- 
lated banking  the  country  adopted  a  system  which  is  inelastic 
and  ill  adapted  to  present  conditions,  and  which  does  not 
sufficiently  take  into  account  the  growth  of  experience  and 
bkill  in  banking. 

109.     Finances  of  the  Mexican  War. 

The  Mexican  War  broke  out  in  May,  1846,  and  was  closed 
by  the  peace  of  February  2,  1848.  A  short  and  sharp  contest, 
it  caused  no  serious  financial  depression,  and  the  debt  created 
was  simply  and  easily  met.  The  expenditures  of  the  war  de- 
partment during  the  three  years  April  1,  1846,  to  April  1,  1849, 
were  $80,845,116,  as  compared  with  $21,991,123  in  the  three 
previous  years ;  and  the  expenditures  of  the  navy  department 
for  the  period  April  1,  1846,  to  October  1,  1848,  were  $18,- 
758,900,  as  compared  with  $14,007,281  for  the  two  and  a 
half  years  before  the  war.  These  sums,  making  a  total  excess 
of  $63,605,621,  were  met  by  loans  in  the  form  of  treasury 
notes  and  government  stock.  In  all  a  net  indebtedness  of 
$49,000,000  was  created,  but  owing  to  the  reissue  of  treasury 
notes  and  the  conversion  of  treasury  notes  into  stock  the 
details  of  the  several  loans  under  the  acts  of  July  22,  1846, 
January  20,  1847,  and  March  31,  1848,  cannot  be  clearly  pre- 
sented in  a  narrow  space.  All  of  the  loans  were  placed  at  par 
and  a  portion  yielded  a  premium  aggregating  over  a  half  million 
dollars.  This  success  may  well  be  compared  with  the  financier- 
ing of  the  War  of  181 2,  when  loans  in  stock  were  sold  with  diffi- 
culty and  at  a  discount  and  treasury  notes  were  depreciated.  The 
ease  of  the  treasury  was  due  not  so  much  to  a  wiser  intelligence 
as  to  the  great  increase  in  the  wealth  of  the  country  and  to  the 
advance  in  government  credit.  Under  one  of  the  loan  acts 
when  subscriptions  were  invited  for  $18,000,000,  bids  were  re- 
ceived for  $57,723,000,  almost  all  above  par,  and  the  assign- 


256 


Tariff  and  State  Banks.  [§  no 


ment  was  made  at  rates  from  one- eighth  of  one  per  cent,  to  2 
per  cent,  above  par.  More  significant  than  any  other  tribute 
to  the  credit  of  the  government  was  the  fact  that  the  loan  was 
subscribed  for  in  specie  —  the  first  loan  negotiated  on  this  basis 
since  the  foundation  of  the  government.  The  comment  of  the 
secretary  of  the  treasury  in  his  annual  report  of  1847  on  this 
fortunate  undertaking  justifies  quoting  : 

"  The  magnitude  of  the  loan,  the  fluctuations  below  par  of 
the  previous  stock  and  notes,  the  untried  and  to  many  alarming 
restraining  operation  of  the  constitutional  treasury,  the  heavy 
expenditures  of  the  war,  and  the  requirement  of  all  the  pay- 
ment from  time  to  time  in  specie  were  deemed  by  many  as 
insuperable  obstacles  to  the  negotiation  of  the  whole  of  the 
loan  at  or  above  par.  But  under  the  salutary  provisions  of  the 
constitutional  treasury  the  credit  of  the  government  was  in 
truth  enhanced  by  receiving  and  disbursing  nothing  but  coin  ; 
thus  placing  all  its  transactions  upon  a  basis  more  sound  and 
entitled  to  higher  credit  than  when  it  held  no  specie,  had  no 
money  in  its  own  possession,  and  none  even  in  the  banks  to  pay 
its  creditors  but  bank  paper.  Then,  it  was  dependent  upon 
the  credit  of  the  banks  and  was  subjected  to  every  fluctuation 
which  affected  their  credit.  Now,  it  stands  upon  the  basis  of 
specie,  so  as  to  be  above  all  suspicion  of  discredit,  whilst  by  its 
demand  for  coin  for  revenue  payments  it  sustains  not  only 
its  own  credit  but  renders  more  safe  the  credit  and  currency 
and  business  of  the  whole  Union." 

An  error  of  judgment  was  made  in  coupling  so  high  a  rate 
of  interest  as  6  per  cent,  with  long  terms  of  ten  and  twelve 
years  before  maturity,  for  on  account  of  business  prosperity  the 
bonds  quickly  went  to  a  premium,  and  their  redemption  when 
the  government  wished  to  pay  its  debts  from  the  surpluses 
enjoyed  in  185  0-185  6  was  a  costly  operation. 

110.     Commercial  Expansion. 

The  period  from  1846  to  1857  was  one  of  great  industrial 
prosperity.     Besides  the  war  with  Mexico,  with  its  abnormal 


§  m]      Progress  toward  Lower  Duties.       257 

expenditures,  business  and  public  finance  were  affected  by  the 
discovery  of  gold  in  California,  by  the  revolutionary  disturb- 
ances on  the  Continent,  by  the  famine  in  Ireland,  and  by 
the  extension  of  railroads  in  the  West.  In  1845  the  number 
of  immigrants  to  this  country  was  114,000  ;  in  1847,  225,000  ; 
and  in  each  of  the  five  years  after  1849  it  was  more  than 
350,000.  More  immigrants,  in  fact,  came  between  1845  and 
1855  than  in  the  preceding  twenty-five  years.  The  statistics 
of  railroad  construction  also  tell  a  wonderful  story;  in  1846 
there  were  about  5000  miles  in  operation;  but  after  1848 
the  annual  gain  in  construction  was  over  1000  miles  until  we 
come  to  the  war  period  of  1861.  The  famine  in  Ireland  not 
only  sent  out  thousands  of  laborers,  it  also  created  a  great 
demand  for  American  wheat  and  of  course  increased  our 
purchasing  power.  An  important  change  was  also  made  in 
commercial  conditions  by  the  reduction  and  abolition  of  import 
duties  in  England  which  began  in  1842.  With  the  removal  of 
these  duties  and  the  rapid  extension  of  manufacturing  industries 
in  England  there  was  a  great  increase  in  exports  (principally 
cotton  and  food  products)  from  the  United  States.  The 
addition  of  the  large  territory  ceded  by  Mexico  increased 
importations  and  hence  the  revenue,  and  the  extraordinary 
development  in  California  had  a  stimulating  influence  upon 
the  whole  nation.  The  country  possessed  resources  only  par- 
tially developed,  yet  open  to  ready  conquest  through  the 
application  of  railways  and  new  machinery.  It  was  indeed,  as 
Secretary  Walker  with  glowing  optimism  repeatedly  affirmed 
in  his  annual  reports,  "  a  new  commercial  era." 

111.    Progress  toward  Lower  Duties. 

The  wonderful  revolution  which  was  taking  place  in  com- 
merce and  in  industry  makes  it  impossible  to  generalize  from 
this  experience  as  to  the  effect  of  import  duties  upon  economic 
development ;  very  likely  prosperity  would  have  followed 
under  any  system  of  revenue  laws.  The  condition  of  the 
treasury  grew  more  and  more  favorable  as  soon  as  the  tempo- 

17 


258  Tariff  and  State  Banks.  [§  m 

rary  burdens  occasioned  by  the  Mexican  War  were  removed ; 
between  1846  and  185 1  the  national  debt  was  increased  from 
#15,550,000  to  #68,304,000  by  war  loans,  but  after  the  latter 
year  the  reduction  was  continuous  until  in  1857  the  principal 
was  #28,700,000.  The  receipts  passed  all  expectations ;  the 
customs  revenue  was  large ;  the  new  territory  on  the  Pacific 
drained  merchandise  from  the  Atlantic  ports,  which  "left  a 
vacuum  to  be  filled  by  fresh  and  larger  importations  of  foreign 
dutiable  goods."  Again  the  sales  of  public  lands  yielded  a 
large  sum  amounting  in  the  three  years  1854-185 6  to  over 
#28,000,000. 

Although  expenditures  reached  a  much  higher  level  than 
before  the  Mexican  War  there  was  a  handsome  surplus  of 
receipts  over  expenditures  to  be  applied  to  the  debt,  and  it 
was  early  seen  that  as  soon  as  the  small  debt  was  extinguished 
another  surplus  would  arise.  The  Whig  secretaries  of  the 
treasury  in  the  Taylor-Fillmore  administration,  W'illiam  E. 
Meredith  and  Thomas  Corwin,  true  to  their  party  convictions, 
endeavored  to  turn  this  experience  to  the  benefit  of  the  pro- 
tectionist cause.  Their  efforts,  however,  made  little  impres- 
sion, and  so  well  satisfied  was  the  country  with  its  revenue 
system  that  during  the  ten  years  1846— 1856  the  tariff  question 
ceased  to  be  an  issue  in  politics.  In  the  seven  party  plat- 
forms of  1848,  1852,  and  1856  the  only  reference  to  the 
tariff  was  in  that  of  the  Whigs  in  1852,  when  a  mild  reference 
was  made  to  the  wisdom  of  tariff  discrimination  by  specific 
duties  in  encouragement  of  American  industries.  The  atten- 
tion of  Congress  during  this  .period  went  chiefly  to  the  slavery 
debates  of  1847-1850,  and  to  the  Kansas-Nebraska  Bill  of 
1854  and  its  consequences. 

The  country  was  drifting  towards  free  trade,  and  there  was 
even  suggestion  that  all  tariffs  might  be  repealed  and  direct 
taxes  and  other  receipts  relied  upon.  James  Guthrie,  who 
became  secretary  of  the  treasury  under  President  Pierce  in 
1855— 1857,  did  not  go  so  far  as  this,  but  he  continually  advised 
further  reductions  in  the  customs  duties ;  his  definite  proposal 


§  ii2]        Local  Banking,  1 837-1861.         259 

was  that  all  articles  paying  duties  be  divided  into  two  classes, 
one  paying  ioo  per  cent,  and  the  other  25  per  cent.,  a  group- 
ing which  would  entirely  remove  the  possibility  of  assimilat- 
ing goods  of  one  class  to  another  in  order  to  secure  lower 
rates ;  he  also  advised  that  the  free  list  be  extended  and  was 
an  early  champion  of  the  admission  of  raw  materials  used  in 
manufactures  free  of  duty.  The  tariff  discussion  during  this 
period  was  practically  concentrated  upon  two  points :  the 
effect  of  the  tariff  upon  commerce  and  its  effect  upon  labor. 
Walker  and  Guthrie,  Walker  in  particular,  eloquently  set  forth 
the  necessity  of  making  imports  free  if  the  country  wished  to 
export  its  surplus  products  and  supported  their  contention  by 
a  mass  of  commercial  and  industrial  statistics  from  the  begin- 
ning of  the  century.  Meredith  and  Corwin,  on  the  other 
hand,  dwelt  upon  the  need  of  protection  to  American  work- 
men who  were  subject  to  competition  with  the  pauper  or 
poorly  paid  labor  of  Europe,  and  they  advanced  equally  in- 
genious tables  of  statistics  to  show  that  it  would  be  far  more 
profitable  to  sell  these  goods  to  a  home  market  of  manufacturers 
and  artisans,  and  thus  distribute  the  costs  of  transportation  to 
railroads  and  canal  companies  at  home  rather  than  to  foreign 
steamship  companies. 

112.    Local  Banking,  1837-1861. 

An  independent  treasury  system  was  really  a  protest 
against  State  banks  as  well  as  against  a  national  bank ; 
although  there  were  signs  here  and  there  of  a  growing  conser- 
vatism in  bank  management  there  was  much  to  criticise.  The 
rapid  expansion  and  contraction  of  circulation  which  took 
place  between  1837  and  1842  has  already  been  referred  to; 
between  the  latter  date  and  1861  the  statistical  changes  in 
the  principal  items  of  the  banking  business  were  as  follows 
(amounts  in  millions  of  dollars)  :  — 


260 


Tariff  and  State  Banks. 


[§ 


Year 

Number 
of  banks 

Capital 

Loans 

Deposits 

Circulation 

Specie 

1843 

691 

228.9 

254-5 

56.2 

58.6 

33-5 

1844 

696 

210.9 

264.9 

84.6 

75.2 

49-9 

1845 

707 

206.0 

288.6 

88.0 

89.6 

44-2 

1846 

707 

196.9 

312. 1 

96.9 

105.6 

42.0 

1847 

7'5 

203.1 

3io-3 

91.8 

•°5-5 

35- • 

1848 

751 

204.8 

344-5 

103.2 

128.5 

46.4 

1849 

782 

207.3 

332-3 

91.2 

114.7 

43-6 

1850 

824 

217-3 

364.2 

109.6 

i3«-4 

45-4 

1851 

879 

227.8 

413-7 

129.0 

•55-2 

48.7 

1852 

1853 

75o 

207.9 

408.9 

145-6 

146. 1 

47-' 

1854 

1208 

3°'-4 

557-4 

188.2 

204.7 

59-4 

1855 

1307 

332.2 

576.1 

190.4 

187.0 

53-9 

J  856 

1398 

343-9 

634.2 

212.7 

'95-7 

59-3 

1857 

1416 

370.8 

684.5 

230.4 

214.8 

58.3 

1858 

1422 

394-6 

5832 

185.9 

•55.2 

74-4 

1859 

1476 

402.0 

657.2 

259.6 

•93-3 

104.5 

i860 

1562 

421.9 

691.9 

253-8 

207.1 

83.6 

1861 

1 601 

429.6 

696.8 

257.2 

202.0 

87.7 

Where  the  States  insisted  on  proper  precautions  the  banks 
were  good,  sound,  and  commercially  serviceable.  In  Massa- 
chusetts for  example,  in  the  period  of  commercial  embarrass- 
ment between  1837  and  1844,  32  banks  suspended,  but  the 
circulation  of  all  but  one  was  redeemed;  from  1844  to  1855 
only  two  banks  failed,  and  all  the  note-holders  were  paid  in 
full.  In  New  York,  where  business  conditions  were  not  so 
settled,  the  results  were  less  fortunate.  Under  the  free  bank- 
ing system  inaugurated  in  1839  there  were  nearly  60  failures; 
but  of  these  one-half  were  in  the  first  five  years.  It  was  dur- 
ing this  period  that  there  was  developed  in  this  State  the  plan 
of  basing  issues  upon  deposits  of  approved  securities,  a  plan 
which  was  subsequently  utilized  in  the  establishment  of  the 
present  national  banking  system.  In  the  Western  States 
losses  by  bad  banking  were  greater ;  in  Indiana  5 1  of  the 
free  banks  and  private  institutions  failed  between  1852  and 
1857,  with  a  serious  loss  to  note-holders  as  well  as  to  other 
creditors.  On  the  other  hand  the  State  bank  of  Indiana, 
as  well  as  that  of  Illinois,  was  conservatively  managed  and 
presents  an  interesting  illustration  of  the  possibility  of  sound 
local  banking.  A  notable  example  of  banking  in  its  worst 
form  may  be  found  in  the  annals  of  Michigan  ;  tricks  were 


1340        1345        1350        1855        I860    1363 

No.   IV.  — LOCAL   BANK    STATISTICS,    1834-1863. 


§ii2]        Local  Banking,  1 837—1 861.  261 

employed  to  deceive  the  official  bank  commissioners  as  to  the 
amount  of  specie  on  hand ;  the  same  boxes  or  bags  of  specie 
were  quickly  transferred  from  one  institution  to  another,  to 
perform  a  continuous  service  of  reserve.  In  the  words  of  the 
commissioners,  "  gold  and  silver  flew  about  the  country  with 
the  celerity  of  magic ;  its  sound  was  heard  in  the  depths  of 
the  forest,  yet,  like  the  wind,  one  knew  not  whence  it  came  or 
whither  it  was  going."  In  one  instance  it  was  found  that  the 
alleged  box  of  specie  showed  a  stratum  of  gold  and  silver  but 
all  beneath  was  nails  and  glass.  With  the  best  intentions  it 
was  hard  to  keep  in  order  the  Western  banks  in  remote  sections 
or  on  the  frontier. 

The  question  of  the  right  of  a  State  to  establish  under  its 
own  control  a  bank  with  power  of  note  issue  was  finally 
decided  by  the  Supreme  Court  under  the  influence  of  the 
stricter  constructionists,  led  by  Chief-Justice  Taney,  in  favor  of 
the  States.  The  decisive  case  was  that  of  Briscoe  v.  The 
Commonwealth  of  Kentucky ;  when  first  argued  in  1834  two 
of  the  seven  judges  were  absent  and  two  of  the  remaining  five 
were  of  the  opinion  that  the  notes  issued  by  the  bank  of  the 
Commonwealth  were  not  bills  of  credit ;  hence  a  decision  was 
withheld.  In  1837  the  court  was  complete  and  an  opinion 
was  rendered ;  Marshall's  opinion  was  practically  overruled, 
although  the  court  made  a  sharp  distinction  between  bills  is- 
sued on  the  credit  of  a  State  and  those  issued  by  an  institution 
in  which  the  State  may  have  become  an  exclusive  stockholder, 
without,  however,  imparting  to  the  bank  any  of  the  attributes 
of  sovereignty.  Five  of  the  judges  who  concurred  in  this 
opinion,  including  Taney,  were  appointees  of  Jackson  ;  Justice 
Story  alone  in  a  dissenting  opinion  maintained  the  arguments 
which  Marshall  had  so  powerfully  elaborated  during  his  long 
term  as  chief  justice.  Later,  in  the  case  of  Bank  of  Augusta 
v.  Earle  (1839),  the  court  held  that  the  right  to  issue  bank- 
notes was  at  common  law  an  occupation  open  to  all  men, 
which  the  State  might  restrain  if  it  saw  fit,  thus  implying  that 
the  national  government  had  no  direct  control. 


262  Tariff  and  State  Banks.  [§  113 

In  passing  judgment  upon  the  many  defects  and  short- 
comings of  the  varied  systems  of  local  banking  it  must  be 
taken  into  account  that  any  system  would  probably  have 
broken  down,  for  during  the  long  period  from  1815  to  i860 
there  was  a  reckless  spirit  of  speculative  enterprise  always 
eager  to  find  an  outlet  through  the  channels  of  credit.  A 
practical  defect  in  the  banking  of  that  period,  aside  from 
opportunities  for  irresponsible  operations,  was  the  lack  of  uni- 
formity of  note  security,  which  resulted  in  great  confusion  in 
the  ordinary  currency.  A  country  merchant  might  receive 
and  pay  out  a  thousand  kinds  of  notes,  some  good,  some 
doubtful,  some  presumably  bad,  and  this  condition  grew  worse 
as  the  circle  of  business  activity  was  enlarged  with  the  con- 
struction of  railroads.  The  field  of  bad  currency  was  thus 
made  wider  and  a  good  system  of  banking  had  to  suffer  in 
public  opinion  because  of  competition  with  banks  which  had 
no  character  fo  maintain.  This  defect,  as  will  be  seen,  was  a 
forcible  argument  in   1863  in  favor  of  establishing  a  national 

system. 

113.    Tariff  of  1857 ;  Panic. 

The  need  of  a  reduction  of  revenue  pressed  with  such 
urgency  that  a  tariff  measure  was  enacted  March  3,  1857, 
lowering  many  of  the  duties  and  enlarging  the  free  list.  The 
schedules  of  1846  were  taken  as  a  basis  and  the  following 
principle  was  applied  :  upon  articles  enumerated  in  schedules 
A  and  B  rates  were  reduced  from  100  per  cent,  and  40  per 
cent,  to  30  per  cent. ;  on  articles  in  schedule  C  from  30  per 
cent,  to  24  per  cent. ;  in  schedule  D  from  25  per  cent,  to 
19  per  cent. ;  in  schedule  E  from  20  per  cent,  to  15  per  cent. ; 
in  schedule  F  from  15  per  cent,  to  12  per  cent.;  in  schedule 
G  from  10  per  cent,  to  8  per  cent.;  in  schedule  H  from  5 
per  cent,  to  4  per  cent. ;  and  on  articles  not  specifically  pro- 
vided for  from  20  per  cent,  to  15  per  cent.  In  the  applica- 
tion of  this  principle  some  exceptions  were  made ;  many 
drugs  and  dry  stuffs,  articles  used  in  chemical  arts,  raw  silk, 
tin,  and  wood  were  placed  upon  the  free  list  or  else  transferred 


ii3]  Tariff  of  1857  ;   Panic. 


263 


to  lower  rate  schedules ;  cotton  manufactures  were  favored  by 
leaving  the  cotton  duties  nearly  as  high  as  established  by  the 
tariff  of  1846.  The  average  rates  of  duty  on  dutiable  imports 
during  the  next  four  years  was  as  follows  :  — 


Year 

Per  cent. 

1858 
1859 
i860 
1861 

20 
'9 
'9 
18.1 

The  vote  on  this  measure  did  not  show  a  sharp  party  divis- 
ion. By  geographical  sections  the  vote  in  the  House  of 
Representatives  was  as  follows  :  — 


States 

In  favor 

Opposed 

New  England  .     .     . 
Middle  States  .     .     . 
West  and  Northwest 
South  and  Southwest 
California     .... 

18 
24 

•4 
60 

2 

9 
28 
33 

2 
0 

118 

73 

Hardly  had  the  tariff  of  1857  been  enacted  when  a  sharp 
commercial  and  banking  panic  came  on,  which  for  a  period 
almost  paralyzed  manufactures;  in  August,  1857,  the  Ohio 
Life  Insurance  and  Trust  Company  failed  with  large  liabilities 
to  Eastern  institutions ;  a  panic  occurred  in  New  York,  fol- 
lowed by  a  suspension  of  specie  payments.  Important  rail- 
roads reaching  into  undeveloped  sections  of  the  West  went 
into  bankruptcy,  among  them  the  Illinois  Central,  the  New 
York  and  Erie,  and  the  Michigan  Central.  The  reason  for  the 
crisis  of  1857  is  still  the  subject  of  controversy:  one  alleged 
cause  is  the  lowering  of  tariff  duties  in  1857  ;  and  some  pro- 
tectionists trace  the  collapse  to  the  slow  but  poisonous  work- 
ings   of  the  tariff  of   1846,  —  the   argument  being  that  the 


264  Tariff  and  State  Banks.  [§  113 

reduction  of  duties  stimulated  importations,  which  had  to  be 
paid  for  in  specie,  and  that  this  drain  of  specie  inevitably 
caused  the  panic. 

This  point  of  view  is  set  forth  by  Mr.  Blaine  in  his  "Twenty 
Years  of  Congress  " : '  "  The  protectionists  therefore  hold  that 
the  boasted  prosperity  of  the  country  under  the  tariff  of  1846 
was  abnormal  in  origin  and  in  character.  It  depended  upon  a 
series  of  events  exceptional  at  home  and  even  more  excep- 
tional abroad,  —  events  which  by  the  doctrine  of  proba- 
bilities would  not  be  repeated  for  centuries.  When  peace 
was  restored  in  Europe,  when  foreign  looms  and  forges  were 
set  going  with  renewed  strength,  when  Russia  resumed  her 
export  of  wheat,  and  when  at  home  the  output  of  the  gold 
mines  suddenly  decreased,  the  country  was  thrown  into  dis- 
tress, followed  by  a  panic  and  by  long  years  of  depression. 
The  protectionists  maintain  that  from  1846  to  1857  the  United 
States  would  have  enjoyed  prosperity  under  any  form  of  tariff, 
but  that  the  moment  the  exceptional  conditions  in  Europe  and 
in  America  came  to  an  end  the  country  was  plunged  headlong 
into  a  disaster  from  which  the  conservative  force  of  a  protective 
tariff  would  in  large  part  have  saved  it." 

Other  forces  can  be  discovered  in  this  period  which  were 
destined  to  bring  disaster.  There  had  been  an  exceedingly 
rapid  industrial  development,  occasioned  by  railroad  construc- 
tion out  of  all  proportion  to  immediate  demands  and  by  the 
stimulus  of  enormous  additions  to  the  monetary  medium 
resulting  from  the  new  gold  discoveries.  Speculation  was 
rampant  and  credit  was  once  more  strained  to  the  utmost. 
The  bank-note  circulation  which  in  1843  was  $58,000,000 
amounted  in  1857  to  $214,000,000;  and  loans  had  increased 
from  $254,000,000  to  $684,000,000.  It  is  too  much  to 
claim  that  this  wide-spread  shock  was  due  to  the  tariff  of  1857 
which  had  been  in  operation  but  for  a  few  months,  or  even  to 
the  tariff  of  1846.  To  be  sure  imports  had  increased  and 
there  had  been  a  heavy  export  of  specie  to  pay  for  them,  but 

1  I-  203. 


§114]  Morrill  Tariff.  265 

at  the  same  time  the  production  of  specie  in  the  United  States 
had  been  more  than  enough  to  cover  this  demand  and  to  leave 
a  generous  amount  in  the  country  for  domestic  needs.  It  was 
certainly  unfortunate  that  a  reduction  of  revenue  should  have 
been  made  at  a  time  when,  as  events  proved,  the  government 
treasury  was  about  to  need  special  strengthening ;  but  in  con- 
necting cause  and  effect  it  must  be  borne  in  mind  that  com- 
mercial depressions  have  for  a  century  returned  with  an  almost 
mathematical  regularity,  and  that  it  is  hardly  reasonable  to 
hold  alone  responsible  a  tariff  which  had  apparently  brought 
no  disturbance  during  a  period  of  ten  years. 

114.    Morrill  Tariff. 

The  year  1858  began  a  new  series  of  treasury  deficits  and 
it  was  soon  made  clear  that  another  revision  of  the  revenue 
system  was  imperative  in  order  to  provide  adequate  supplies. 
The  government  was  living  hand-to-mouth,  or  as  Morrill 
pithily  expressed  it,  "was  obliged  to  go  to  bed  without  its 
supper "  every  time  the  imports  of  the  week  fell  short  a 
million  at  the  port  of  New  York.  Howell  Cobb,  the 
Democratic  secretary  of  the  treasury,  and  the  Republicans  in 
control  of  the  House  of  Representatives  were  both  agreed  as 
to  the  need  of  the  treasury,  although  they  differed  as  to  the 
method  of  relief.  Secretary  Cobb  thought  that  the  difficulty 
could  best  be  met  by  raising  rates  in  schedules  C,  D,  F,  G,  and 
H  to  25,  20,  15,  10,  and  5  per  cent,  respectively,  and  by  trans- 
ferring certain  articles  from  the  lower  to  higher  schedules ;  he 
denied  the  need  of  reviving  the  higher  schedules  of  40  and 
100  per  cent,  in  the  tariff  of  1846  ;  and  absolutely  condemned 
any  proposal  of  home  valuation.  No  attention  was  paid  to 
Cobb's  recommendation  and  the  country  drifted  on  from  one 
deficit  to  another.  In  the  four  years  of  Pierce's  administration, 
1853-57,  the  national  income  averaged  over  $68,000,000 
annually;  but  in  1858  it  dropped  to  $46,500,000;  and  in  the 
three  years  1858-60   deficits  accumulated  to  the  amount  of 


266 


Tariff  and  State  Banks. 


[§»4 


$50,000,000.  At  the  same  time  current  appropriations  were 
increased;  and  it  was  repeatedly  necessary  to  resort  to  the 
issue  of  short-term  treasury  notes  and  also  of  bonds.  Only  a 
small  amount  of  time-loans  was  placed  on  account  of  the 
low  rate  of  interest,  5  per  cent.,  which  the  bond  bore,  and 
because  of  the  provision  in  the  law  against  selling  at  less 
than  par. 

In  the  winter  of  1859-60  the  Republicans  had  a  plurality 
in  the  House  of  Representatives,  and  Justin  S.  Morrill,  a 
Republican  member  from  Vermont,  introduced  a  tariff  bill  on 
which  much  labor  had  been  spent.  Morrill  was  a  protectionist 
by  conviction,  but  realized  there  was  no  chance  of  passing  a 
protectionist  measure.  His  bill  was  moderate ;  in  his  own 
words  :  "  No  prohibitory  duties  have  been  aimed  at ;  but  to 
place  our  people  upon  a  level  of  fair  competition  with  the  rest 
of  the  world  is  thought  to  be  no  more  than  reasonable.  Most 
of  the  highest  duties  fixed  upon  have  been  so  fixed  more  with 
a  view  to  revenue  than  protection."  The  most  important 
change  proposed  was  a  return  to  specific  duties  on  many 
commodities  which  were  subject  to  undervaluation  and  fraud- 
ulent entry,  as  illustrated  by  the  following  examples :  — 


Commodity 

1846 

1857 

1861 

Carpets,  valued  $1.25  per  sq.  yd.    .     . 
Raw  wool,  valued  18  to  24  cts.  per  lb. 

30  per  cent. 
25  per  cent. 
20  per  cent. 
30  per  cent. 

24  per  cent. 
19  per  cent. 
15  per  cent. 
24  per  cent. 

40  cts.  per  sq.  yd. 
2j  cts.  per  lb. 
ij  cts.  per  lb. 
3  cts.  per  lb. 

Where  ad  valorem  rates  were  continued  a  return  was  gen- 
erally made  to  the  duties  of  1846.  The  bill  passed  the  House, 
May  10,  i860,  by  a  vote  of  105  to  64.  This  success  together 
with  the  protectionist  plank  in  the  Republican  national  plat- 
form adopted  a  few  weeks  later  was  undoubtedly  a  factor 
which  won  Pennsylvania  from  the  Democracy  and  elected 
Lincoln  president  in    November.     The   measure  passed    the 


1791 


1795 


1800 


1805 


1810 


1815 


1820 


1825 


1830 


1835 


1840 


§  us]         Receipts  and  Expenditures.  267 

Senate  the  following  winter,  after  secession  had  removed  many 
members,  and  became  law  March  2,  1861. 

115.    Receipts  and  Expenditures,  1846-1861. 

In  following  the  course  of  receipts  and  expenditures  sum- 
marized in  the  statistical  tables  of  the  treasury  more  than 
usual  caution  must  be  exercised  for  the  period  1 846-1861  be- 
cause of  changes  in  the  system  of  accounts.  By  years  receipts 
were  as  follows  :  — 


» 

* 

Year 

Customs 

Public  lands 

Miscellaneous 

Total 

1846 

$26,712,000 

$2,694,000 

$293,000 

$2g, 699,000 

1847 

23,747,000 

2,498,000 

222,000 

26,467,000 

1848 

31,757,000 

3,328,000 

543,000 

35,628,000 

1849 

28,346,000 

1 ,688,000 

687,000 

30,721,000 

1850 

39,668,000 

1,859,000 

2,065,000 

43,592,000 

185. 

49,017,000 

2,352,000 

1,186,000 

52.555.OOO 

1852 

47,339,000 

2,043,000 

464,000 

49,846,000 

1853 

58,931,000 

1,667,000 

989,000 

61,587,000 

1854 

64,224,000 

8,470,000 

1,106,000 

73,800,000 

1855 

53,025,000 

11,497,000 

828,000 

65.350,000 

1856 

64,022,000 

8,917,000 

1,117,000 

74,056,000 

1857 

631875.000 

3,829,000 

1,261,000 

68,965,000 

1858 

41,789,000 

3,513,000 

i, 353. 000 

46,655,000 

.859 

49,565,000 

1,756,000 

1,456,000 

52,777,000 

i860 

53,187,000 

1,778,000 

1,089,000 

56,054,000 

1S61 

39,582,000 

870,000 

1,024,000 

41,476,000 

Expenditures  were  as  follows  :  — 


Year 

War 

Navy 

Indians 

Pensions 

Interest 
on  debt 

Miscel- 
laneous 

Total 

1846 

$10,413,000 

$6,455,000 

$1,027,000 

$1,811,000 

$842,000 

$6,711,000 

$27,261,000 

1847 

35,840,000 

7,900,000 

1,430,000 

1,744,000 

1,119,000 

6,885,000 

54,920,000 
47,618,000 

1848 

27,688,000 

9,408,000 

1,252,000 

1,227,000 

2,390,000 

5,650,000 

1849 

14,558,000 

9,786,000 

1,374,000 

1,328,000 

3,565,000 

12,885,000 

43,499,000 

1850 

9,687,000 

7,904,000 

1,663,000 

1,866,000 

3,782,000 

16,043,000 

40,948,000 

1 85 1 

12,161,000 

8,880,000 

2,829,000 

2,293,000 

3,696,000 

17,888,000 

47,751,000 

1852 

8,521,000 

8,918,000 

3,043,000 

2,401,000 

4,000,000 

1 7, 504 ,000 

44,390,000 

18,3 

9,910,000 

1 1,067,000 

3,880,000 

1,756.000 

3,665,000 

17,463,000 

47.743.ooo 

18S4 

11,722,000 

10,790,000 

1,550,000 

1,232.000 

3,070,000 

26,672,000 

55,038,000 

18,5 

14.648,000 

13,327,000 

2,772,000 

1,477,000 

2,314,000 

24,090,000 

58,630,000 

1856 

16,963,000 

14,074,000 

2,644,000 

1,296,000 

1,953,000 

31,794,000 

68,726,000 

1857 

19,159,000 

12,651,000 

4.3  5  4, 000 

1,310,000 

1,593,000 

28,565,000 

67,634,000 

1858 

25,679,000 

14,053,000 

4,978,000 

1,219,000 

1,652,000 

26,400,000 

73,g82,ooo 

18S9 

23,154,000 

1 4 ,690,000 

3,490,000 

1,222,000 

2,637,000 

23,797,000 

68,993,000 

i860 

16,472,000 

11,514,000 

2,991,000 

1, 100,000 

3,144,000 

27,977,000 

63,201,000 

1861 

23,001,000 

13,387,000 

2,865,000 

1  034,000 

4,034,000 

23,327,000 

66,650,000 

268 


Tariff  and  State  Banks. 


[§»5 


By  the  act  of  March  3,  1849,  the  expense  of  collecting  cus- 
toms revenue  was  charged  to  miscellaneous  expenditures  instead 
of  debited  to  accruing  customs  revenue.  This  alone  added 
$2,000,000  annually  to  the  expenditures  account.  Repay- 
ments to  importers  on  excess  collections  swell  the  budget. 
New  expenditures  for  meeting  postal  deficiencies,  and  for 
defraying  the  cost  of  mail  services  for  Congress  and  the  public 
departments  were  authorized  under  the  several  acts  of  March  3, 
1847,  March  3,  1851,  and  March  3,  1853,  and  charged  up 
under  "  Miscellaneous."  Miscellaneous  expenditures  greatly 
increased  through  payments  to  Mexico  and  liquidations  of 
Mexican  claims  under  the  treaty  of  1848,  amounting  between 
1849  and  1858  to  over  $32,000,000.  During  this  period 
public  improvements,  particularly  the  construction  of  public 
buildings  and  light-houses,  were  undertaken  on  a  generous 
scale  :  the  former  were  necessary  in  order  to  provide  de- 
positories for  the  funds  of  the  government,  and  the  latter 
were  demanded  by  the  vigorous  and  expanding  commerce. 
Expenditures  for  the  several  classes  of  internal  improvements 
from  1 83 1  to  i860  were  as  follows  :  — 


Year 

Public 

Rivers 

Roads 

Light-houses 

buildings 

and  harbors 

and  canals 

etc. 

183 '-35 

$752,000 

$3,058,000 

$4,208,000 

$1,535,000 

1836-40 

".534.000 

4,206,000 

3,370,000 

2,597,000 

«84i-4S 

845,000 

1,113,000 

596,000 

1,772,000 

1846-50 

1,324,000 

352,000 

714,000 

3,108,000 

1851-55 

4,603,000 

2i334.oo° 

939,000 

5,562,000 

1856-60 

10,037,000 

>.373.ooo 

2,507,000 

7,931,000 

Expenditures  for  rivers,  harbors,  roads,  and  canals  as  here 
tabulated  are  included  under  "  War  "  in  the  second  table  on 
page  267,  while  expenditures  for  public  buildings  and  light- 
houses are  to  be  found  under  "  Miscellaneous." 

A  comparison  of  income  and  outgo  is  made  in  the  following 
table  in  millions  of  dollars  :  — 


§  1 1 5 J         Receipts  and  Expenditures.  269 


Year 

Receipts 

Expendi- 
tures 

Surplus 

Deficit 

Taxes 

Other 

Total 

1846 
1847 
1848 
1849 
1850 
1851 
1852 
1853 
1854 
'855 
1856 
1S57 
1858 
1859 
i860 
1861 

26.7 
23-7 
3>-7 
28.J 
39-6 
49.0 
47-3 
589 
64.2 

53° 
64.0 
63.8 
4W 
49-5 
53-i 
39- S 

2.9 

2-7 

3-9 
2.4 
39 
3-5 

2-5 

2.6 
9.6 

"•3 
10.0 

5-' 
4-9 
3-2 
2.9 
i-9 

29.6 
26.4 
35-6 
3°-7 
43-5 
5»-5 
49.8 
61.5 
73  8 
65-3 
74.0 
68.9 
46.6 

52-7 
56.0 
41-4 

27.2 
54-9 
47.6 
43-4 
40.9 

47-7 
44-3 
47-7 
S5-o 
58.6 
68.7 
67.6 
73-9 
68.9 
63.2 
66.6 

2-4 

2.6 
4.8 
5-5 
«3-8 
18.8 
6.7 
5-3 
i-3 

28.  s 
12.0 
12.7 

273 
16.2 
7-2 

25.2 

Of  the  secretaries  of  the  treasury  after  Walker,  James  Guthrie 
deserves  special  mention.  No  great  administrative  act  is  as- 
sociated with  his  name ;  his  reputation  rests  rather  in  the 
traditions  of  the  treasury  department  and  in  his  official 
reports  which  deal  with  questions  now  rarely  raised  in  public 
controversy.  He  clearly  realized  the  significance  of  the 
growth  of  government  business,  which  is  reflected  in  the 
preceding  tables,  and  that  this  demanded  a  careful  revision 
of  departmental  methods.  This  was  the  more  necessary 
on  account  of  the  construction  of  new  custom  houses  and 
branch  mints,  and  the  re-organization  of  the  treasury  depart- 
ment due  to  the  transfer  of  the  land  office  and  of  certain 
supervisory  responsibilities  relating  to  the  expenditures  of 
the  United  States  courts,  to  the  interior  department  established 
in  1849.  Guthrie  prescribed  new  forms  of  accounting,  in- 
sisted upon  a  prompt  settling  of  accounts,  enlarged  the  scope 
cf  statistical  returns,  and  placed  the  independent  treasury 
system  upon  a  business  basis.  New  depositories  were  estab- 
lished for  disbursing  officers,  and  the  accounts  of  officials 
which  were  in  arrears  in  March,  1853,  to  the  enormous 
sum   of  $132,000,000  were  reduced  by  December,  1855,  to 


270  Tariff  and  State  Banks.  [§  115 

#25,000,000.  Guthrie  recognized  the  dangers  of  extravagant 
appropriations,  and  during  the  period  of  treasury  prosperity 
preceding  the  panic  of  1857,  exercised  a  firm  control,  as 
far  as  his  power  extended,  to  keep  the  finances  in  a  sound 
condition. 


CHAPTER  XII. 
CIVIL   WAR;   LEGAL  TENDERS. 

116.    References. 

Bibliographies;  Bogart  and  Rawles,  43-45;  Chanriing  and  Hart, 
419-420. 

Financial  Situation  in  1S61 :  Statutes,  XII,  259  (Act  of  July  17, 
1861) ;  Finance  Report,  1860-1861  ;  Bankers'  Magazine,  XVI  (1861-1862), 
161-170  (loan  of  August),  290-293,  509;  XVII,  135-150  (loan  com- 
mittee); J.  Sherman,  Recollections,  I,  251-258;  J.  G.  Blaine,  Twenty 
Years,  I,  396-408;  Bolles,  III,  20-42;  S.  VV.  McCall,  Stevens,  139-151. 

Suspension  of  Specie  Payments:  Finance  Report,  1862,  pp.  7-8; 
W.  C.  Mitchell,  Suspension  0/  Specie  Payments,  in  Jour,  of  Pol.  Econ., 
VII,  289-326  (exhaustive  study);  Bolles,  III,  34-40,  139-140;  A.  B. 
Hart,  Chase,  230-234 ;  W.  G.  Sumner,  History  of  American  Currency, 
194-197  ;  W.  G.  Sumner,  History  of  Banking,  458-461 ;  H.  White, 
150-152. 

Legal  Tender  Notes  :  (i)  Sources,  Finance  Report,  1861,  pp.  17-20  ; 
1862,  pp.  12-16;  1863,  p.  17;  Statutes,  XII,  345,  532,  709;  or  Dunbar, 
163,  167,  173;  E.  McPherson,  History  of  the  Rebellion,  357;  Sound  Cur- 
rency, III  (Jan.  15,  1896),  No.  4  (extracts  of  congressional  debates); 
Bayley,  369-385,  445-457;  W.  F.  de  Knight,  77-99;  E.  G.  Spaulding, 
History  of  Legal  Tender  Paper  Money  (1869;  extracts  from  documents, 
etc.);  C.  Sumner,  Works,  VI,  319-345;  J-  Sherman,  Speeches,  23-32; 
J.  Sherman,  Recollections,  I,  268-283;  J-  *-*•  Blaine,  Twenty  Years,  I, 
409-437.  (ii)  Special,  W.  C.  Mitchell,  Greenbacks  and  the  Cost  of  the 
Civil  War,  in  Jour.  Pol.  Econ.,  V  (1897),  117-1 56  (most  thorough 
study  of  effects);  also  in  Report  of  Monetary  Commission  (1898),  445- 
479;  H.  Adams,  Historical  Essays,  281-317;  J.  J.  Knox,  United  States 
Notes,  122-147;  Bolles,  III,  43-86,  130-158;  H.  White,  149-165;  Re- 
port of  Monetary  Commission  (1898),  399-416,  502-508  (statutes);  W. 
G.  Sumner,  American  Currency,  197-209;  J.  K.  Upton,  Money  and  Poli- 
tics (1884),  67-110;  C.  J.  Bullock,  Monetary  History,  96-99  (references); 
F.  A.  Walker,  Monty,  369-372;  H.  C.  Adams,  Public  Debts,  145-146, 
166 ;  J.  L.  Laughlin,  Mill's  Political  Economy,  358  (fluctuations  in  value)  ; 
F.  P.  Powers,  Greenbacks  in  War,  in  Pol.  Sci.  Quar.,  II,  79-90;  S.  New- 
comb,  Critical  Examination  of  our  War  Policy  ( 1865) ;  A.  B.  Hart,  Chase, 
245-252  ;  S.  W.  McCall,  Stevens,  152-173  ;  J.  F.  Rhodes,  History  of  United 
States,  III,  559-572  (references);  IV,  237. 

271 


272  Civil  War;   Legal  Tenders.         [§  117 

Treasury  Notes:  Dunbar,  158-196;  Bayley,  370-383,445-460;  \V. 
F.  de  Knight,  79-98;  W.  C.  Mitchell,  in  Jour.  Pol.  Econ.,  X  (1902), 
544-530  (demand  notes;  valuable  references),  550-559  (fractional),  566- 
570  (treasury  notes)  ;  R.  M.  Breckenridge,  Demand  Notes  of  1861,  in 
Sound  Currency,  V  (1898),  No.  20  (foot-notes)  ;  Bolles,  III,  5-8,  29-30, 
61,  84-85,  114,  126-128,  251. 

Gold  Sales:  Statutes,  XIII,  132;  or  Dunbar,  191-193;  J.  A.Garfield, 
Works,  I,  35-41;  Bolles,  III,  142-147;  H.  White,  174-190;  J.  K.  Upton, 
Money  and  Politics,  176-193;  A.  B.  Hart,  Chase,  284-289. 

117.    The  Situation  in  1860. 

The  result  of  the  elections  of  November,  i860,  gave  a  severe 
shock  to  public  and  private  credit ;  Southern  banks  withdrew 
large  amounts  of  money  on  deposit  in  Northern  banks ;  loans 
were  contracted ;  and  by  the  middle  of  the  month  the  panic 
was  complete.  The  government  resorted  to  another  treasury 
note  issue  under  the  act  of  December  17,  i860,  but  so  low 
was  the  public  credit  and  so  disturbed  the  public  mind  that 
to  float  the  notes  at  par  it  was  necessary  to  pay  from  10  to  12 
per  cent,  interest  on  the  larger  part.  With  the  beginning  of 
the  year  1861,  although  secession  was  becoming  an  accom- 
plished fact,  the  appointment  of  John  A.  Dix  as  secretary  of 
the  treasury  in  place  of  Howell  Cobb,  with  other  changes  in 
the  cabinet,  restored  some  measure  of  confidence  in  public 
credit.  More  vigorous  efforts  followed.  By  the  act  of  Feb- 
ruary 8,  1 86 1,  a  6  per  cent,  loan  was  authorized  with  no  re- 
strictions as  to  sale  at  par,  and  this  was  reinforced  by  a  new 
tax  measure,  the  Morrill  tariff.  Nevertheless,  when  the  new 
administration  of  Lincoln  entered  upon  its  difficult  task  on 
March  4,  it  found  the  treasury  practically  empty,  the  ad- 
ministrative departments  disorganized,  customs  receipts  almost 
at  a  standstill,  the  debt  increasing,  and  government  credit 
ebbing  away.  Nor  could  there  be  any  thorough-going  plans 
for  the  future,  because  nobody  could  clearly  foresee  the  turn 
of  political  affairs. 

The  unsatisfactory  condition  of  the  treasury  in  i860  is  the 
more  striking  because  the  nation  in  that  year  was  in  excellent 
economic  and  material  condition.     The  depression  of  1857 


§n7]  The  Situation  in  i860.  273 

was  but  temporary  in  its  industrial  effects ;  the  development 
of  railroad  construction  and  shipping  was  speedily  resumed ; 
crops  were  abundant  and  prices  remunerative.  The  cotton 
crop  in  i860  reached  4,675,770  bales,  nearly  a  million  bales 
more  than  in  any  previous  year ;  great  gains  had  been  made 
in  the  crops  of  wheat,  corn,  and  other  cereals ;  the  production 
of  anthracite  coal  in  Pennsylvania  was  nearly  800,000  tons 
greater  than  in  any  preceding  year;  the  output  of  pig  iron 
was  913,000  tons,  or  130,000  more  than  the  average  of  the 
six  preceding  years ;  exports,  including  the  precious  metals,  had 
reached  the  highest  point  then  known,  $400,000,000  (of  which 
$316,000,000  was  domestic  merchandise),  or  $43,000,000 
more  than  in  any  other  previous  year.  The  consuming  powers 
of  the  people  had  never  been  so  high,  as  was  proved  in  par- 
ticular by  the  unprecedented  demand  for  sugar  and  tea ;  there 
was  but  little  pauperism,  and  wealth  on  the  whole  was  evenly 
distributed.  179,000  immigrants  landed  in  i860,  or  58,000  in 
excess  of  the  preceding  year.  The  tonnage  of  American 
shipping  was  greater  than  ever  before  or  since,  and  two-thirds 
of  our  imports  and  exports  were  carried  in  vessels  having  an 
American  register. 

In  this  wonderful  material  expansion  and  prosperity  the 
Northern  States  had  the  advantage.  Of  the  total  population 
of  31,444,321,  returned  by  the  census  of  i860,  two-thirds 
were  in  the  States  which  remained  in  the  Union  in  1861.  The 
value  of  the  real  and  personal  property  of  the  whole  country 
was  estimated  at  $16,159,000,000,  of  which  $10,957,000,000 
was  credited  to  the  northern  group,  and  in  the  southern 
share  was  included  $2,000,000,000  for  slave  property.  The 
wealth  produced  in  1859  was  valued  at  $3,736,000,000,  of 
which  $2,818,000,000  was  in  the  North.  There  were  a  thou- 
sand million  acres  of  unoccupied  public  lands  north  and  west 
of  the  slave  region,  a  source  of  potential  wealth  to  the  strug- 
gling government :  as  Secretary  Chase  said,  "  There  are  other 
mines  than  those  of  gold  and  silver ;  every  acre  of  the  fertile 
soil  is  a  mine,  and  every  acre  is  open  to  the  fruitful  contact  of 

18 


274  Civil  War;   Legal  Tenders.         [§IlS 

labor  by  the  Homestead  Act."  The  gold-bearing  region  of 
the  Western  States  with  comparatively  insignificant  exceptions 
was  still  the  property  of  the  nation ;  and  the  annual  product 
of  gold  and  silver  was  nearly  $100,000,000.  The  contribu- 
tion of  Southern  ports  to  the  total  import  duties  had  been  but 
$7,000,000,  or  14  per  cent,  of  the  ordinary  annual  income 
from  customs,  and  it  was  estimated  that  of  the  imports  .the 
South  consumed  less  than  half  of  its  proportion  according  to 
population.  The  North  was  also  fortunate  in  possessing  the 
principal  share  of  the  manufacturing  industries  of  the  country. 

118.    Appointment  of  Chase. 

The  political  storm  burst  on  the  country  with  startling 
rapidity :  the  South  Carolina  Ordinance  of  Secession  came 
December  20,  i860;  the  Southern  Confederacy  was  formed 
February  4,  1861  ;  the  civil  war  began  with  the  firing  on  Fort 
Sumter,  April  1 2  ;  and  the  president  called  for  troops  April 
15.  During  the  four  years  of  war  that  followed,  one  of  the 
most  serious  concerns  of  the  government  was  its  public 
finance.  For  secretary  of  the  treasury  President  Lincoln 
chose  Salmon  P.  Chase  of  Ohio.  Chase  was  a  lawyer  who  had 
been  senator  from  Ohio  and  governor  of  that  State,  and  his 
long  experience  in  the  field  of  politics  made  him  a  rival  candi- 
date to  Lincoln  in  the  Republican  Convention  of  i860.  His 
experience  in  public  finance  was  small  and  his  previous  political 
career  had  never  called  for  a  thorough  consideration  of  the 
problems  of  the  treasury.  The  appointment,  however,  was 
not  very  different  from  the  usual  practice  of  successive  ad- 
ministrations which  made  political  leadership  the  principal 
reason  in  selecting  a  secretary  of  the  treasury.  Chase  was 
reluctant  to  accept  the  appointment.  "  I  sought  to  avoid 
it,"  he  writes,  "and  would  now  gladly  decline  it  if  I  might. 
I  find  it  impossible  to  do  so,  however,  without  seeming  to 
shirk  cares  and  labor  for  the  common  good,  which  can- 
not be  honorably  shunned."  A  criticism  of  Chase's  appoint- 
ment or  of  his  administration  of  the  finances  must  take  into  full 


§n8]  Appointment  of  Chase.  275 

account  the  political  traditions  which  had  thus  far  governed 
cabinet  selections ;  and  it  must  also  be  remembered  that 
neither  Lincoln  nor  his  cabinet  officers  appreciated  the  enor- 
mous and  unprecedented  strain  which  was  to  be  placed  upon 
the  treasury  department.  Even  when  the  difficulties  were 
realized,  everybody  supposed  that  they  would  be  of  short 
duration.  To  accuse  Lincoln  of  gross  error  of  judgment,  or 
Chase  of  rash  willingness  to  undertake  duties  for  which  he 
had  not  complete  preparation,  is  to  judge  them  by  events 
which  they  could  not  foresee. 

Any  attempt  to  estimate  the  success  of  Chase  as  a  minister 
of  war  finance  must  also  keep  in  view  the  legislative  personal- 
ities through  whom  he  had  to  work.  The  chairman  of  the 
House  committee  on  ways  and  means,  Thaddeus  Stevens,  was 
a  man  of  great  force,  but  untrained  in  matters  of  taxation  and 
loans,  and  in  disposition  dogmatic,  arbitrary,  and  impatient. 
Although  he  delegated  the  preparation  of  details  to  Justin  S. 
Morrill,  chairman  of  a  sub-committee  on  taxation,  and  to 
Elbridge  G.  Spaulding,  chairman  of  a  sub- committee  on  loans 
and  currency,  he  exercised  a  great  influence  in  the  framing  of 
financial  policies.  Morrill  had  little  opportunity  in  the  early 
years  of  the  war  to  exhibit  his  practical  good  sense  in  ques- 
tions of  the  development  of  revenue ;  and  in  the  framing  of 
tax  bills,  where  the  plain  necessity  was  a  large  revenue,  he 
was  hampered  by  strong  protectionist  sympathies.  Spaulding's 
experience  had  been  limited  to  the  treasuryship  of  the  State 
of  New  York  and  the  management  of  a  local  bank  in  Buffalo, 
and  there  is  no  evidence  that  he  was  competent  to  deal  with 
great  national  measures.  In  the  Senate,  Fessenden,  the 
chairman  of  the  committee  on  finance,  was  an  able  lawyer, 
but  confessed  his  inexperience  on  many  subjects  with  which 
he  had  to  deal.  Since  1845  there  had  been  little  to  arouse 
public  opinion  or  to  train  statesmen  in  questions  of  finance. 
Amid  universal  prosperity  the  tariff  changes  of  1846  and  1857 
had  not  provoked  prolonged  discussion ;  and  the  attention 
of  Congress  had  been  chiefly  turned  to  the  question  of  slavery. 


276  Civil  War ;   Legal  Tenders.        [§119 

119.    Revenue  Measures,  July,  1861. 

When  Chase  entered  upon  his  work  the  public  debt  was 
$74,985,000,  of  which  about  $18,000,000  had  been  incurred 
since  the  beginning  of  the  secession  movement.  The  avail- 
able funds  in  the  treasury  were  but  $1,716,000;  and  until 
Congress  met  for  new  legislation  Chase  was  obliged  to  rely 
upon  previous  loan  acts,  of  which  the  treasury  had  not  yet 
fully  availed  itself.  The  result  was  not  encouraging.  Only  a 
small  amount  of  bonds  was  sold  and  these  at  a  discount,  and 
the  few  millions  of  treasury  notes  issued  were  entirely  inade- 
quate. When  Congress  met  in  special  session,  July  4,  1861, 
Chase  was  ready  to  propose  financial  measures  on  a  more 
comprehensive  scale.  He  estimated  that  the  sum  needed  for 
the  next  year  would  not  fall  far  short  of  $320,000,000  itemized 
as  follows :  — 

Appropriations  for  former  years  yet  unpaid  .     .     .  $20,121,000 

'*              already  made  for  1862       ....  59,589,000 

"              required  by  new  exigencies    .     .     .  217,169,000 

"               to  pay  treasury  notes  becoming  due  12,640,000 

"               to  pay  interest  on  public  debt    .     .  9,000,000 

To  provide  for  the  ordinary  expenditures,  for  the  interest 
on  the  public  debt  to  be  created,  and  for  a  sinking  fund  to 
extinguish  the  debt,  Chase  recommended  that  $80,000,000  be 
raised  by  taxation ;  the  extraordinary  expenses  were  to  be  met 
by  loans.  He  urged  no  great  development  in  the  existing  tax 
system  ;  partly  because  the  possibilities  of  the  tariff  act  of 
March,  1861,  had  not  yet  been  put  to  satisfactory  test,  and 
partly  because  he  did  not  apprehend  that  the  struggle  would 
continue  for  more  than  a  few  months.  He  did,  however, 
recommend  that  duties  be  levied  on  tea  and  coffee,  then  ad- 
mitted free,  and  on  sugar  which  was  lightly  taxed ;  from 
these  sources  he  thought  that  $20,000,000  might  be  derived  ;  ■ 
and  that  a  slight  increase  on  the  general  list  of  dutiable  arti- 
cles would  also  add  $7,000,000  to  a  tariff  of  which  the  ordi- 
nary productivity  might  be  estimated  at  $30,000,000.     With 


§n9]     Revenue  Measures,  July,  1861.        277 

miscellaneous  revenue  he  counted  on  a  total  of  $60,000,000 
a  year ;  wliether  the  remaining  $20,000,000  should  be  raised 
by  taxation,  and  whether  by  direct  taxes  or  internal  revenue 
duties,  Chase  was  in  doubt ;  and  with  deliberately  expressed 
deference  he  left  the  selection  of  the  particular  sort  of  taxation 
to  Congress. 

On  the  proposed  loan  of  $240,000,000  Chase  suggested  a 
high  rate  of  interest,  7.3  per  cent,  on  short-term  treasury 
notes,  or  7  per  cent,  on  long-term  bonds,  to  be  sold  at  not 
less  than  par ;  for  immediate  needs  he  favored  an  issue  of 
treasury  notes  in  smaller  denominations  bearing  a  lower  rate 
of  interest.  "  The  greatest  care  will,  however,  be  requisite  to 
prevent  a  degradation  of  such  issues  into  an  irredeemable 
paper  currency,  than  which  no  more  certainly  fatal  expedient 
for  impoverishing  the  masses  and  discrediting  the  government  of 
any  country  can  well  be  devised."  Congress  quickly  accepted 
the  secretary's  plan  and  in  loan  bills  of  July  17  and  August 
5,  1 86 1,  empowered  the  secretary  to  borrow  not  exceeding 
$250,000,000  in  three-year  7.3  per  cent,  treasury  notes  or 
in  twenty-year  bonds  not  exceeding  7  per  cent.  The  secretary 
was  also  authorized,  in  lieu  of  a  portion  of  the  above  loan,  to 
exchange  for  coin  or  pay  for  salaries  or  other  dues  of  the 
United  States  non-interest- bearing  treasury  notes  not  exceed- 
ing $50,000,000,  of  a  denomination  less  than  $50  but  not  less 
than  $5,  payable  on  demand  and  receivable  for  all  public 
dues  ;  or  notes  bearing  interest  at  3.65  per  cent.,  fundable 
into  treasury  notes  of  denominations  over  $50,  and  payable 
in  one  year.  Unfortunately  Congress  did  not  respond  so  ener- 
getically to  the  recommendations  made  as  to  taxation  ;  a  few 
amendments  of  the  tariff  were  enacted  along  the  general  lines 
suggested  by  Chase,  but  the  rates  in  some  instances  were  less 
than  he  desired.  A  direct  tax  and  an  income  tax  were  also 
imposed,  but  were  hot  to  be  effective  until  after  periods  of 
eight  and  ten  months  respectively.  No  more  finance  legisla- 
tion was  possible  until  the  following  winter ;  and  the  admin- 
istration was  left  poorly  equipped  with  resources  for.  the  contest 


278  Civil  War;   Legal  Tenders.         [§  120 

now  entered  upon.  Abundance  of  credit  had  been  granted, 
but  the  revenue  provided  was  insufficient  to  maintain  this  above 
suspicion  and  still  more  insufficient  for  the  daily  needs  of  the 
treasury. 

120.    Placing  the  Loan  of  $150,000,000. 

In  accordance  with  the  provisions  of  the  above-mentioned 
act  the  secretary  undertook  to  borrow  $150,000,000  by  the 
issue  of  7.3  per  cent,  three-year  notes.  In  view  of  the  diffi- 
culties encountered  by  the  treasury  department  in  placing 
small  loans  during  the  previous  winter  of  1 860-1 861  this  opera- 
tion might  well  seem  hopeless ;  but  three  changes  in  con- 
ditions had  occurred  which  affected  the  disposition  of  capital- 
ists with  funds  to  invest.  In  the  first  place  a  definite  policy 
had  been  adopted ;  loan  and  tax  bills  had  gone  hand  in 
hand ;  and,  in  the  light  available  to  the  most  acute  political 
observers  of  the  time,  ample  provision  had  been  made  for  the 
demands  of  a  contest  which  it  was  confidently  believed  would 
be  over  in  a  few  months.  Secondly,  a  more  liberal  rate  of  in- 
terest was  authorized,  which  tended  to  attract  capital  deprived 
by  political  disturbance  of  its  ordinary  commercial  use. 
Thirdly,  the  spirit  of  loyalty  was  being  aroused  to  the  recog- 
nition of  the  need  of  financial  as  well  as  military  support  of 
the  government :  business  men  more  intelligently  realized  the 
dependence  of  commercial  interests  on  the  stability  of  the 
government.  Thus  it  was  possible  in  one  operation  to  bor- 
row and  transfer  from  the  people  to  the  government  more 
wealth  than  had  as  yet  ever  stood  as  the  principal  of  the 
public  debt. 

Representatives  of  the  banking  institutions  of  Boston,  New 
York,  Philadelphia,  after  consultation  with  the  secretary, 
"  agreed  to  unite  as  associates  in  financial  support  to  the  gov- 
ernment," to  subscribe  to  an  immediate  loan  of  $50,000,000, 
and  to  promise  to  take  two  further  instalments  of  $50,000,- 
000  each.  The  securities  issued  were  to  be  in  the  form  of 
three-year    7.3  per   cent,    treasury  notes.     The   task    of  the 


§  i2o]   Placing  the  Loan  of  $150,000,000.  279 

banks  was  not  an  easy  one,  for  the  institutions  undertaking 
the  negotiations  possessed  a  capital  of  only  $120,000,000,  and 
their  coin  assets  amounted  to  only  $63,000,000  ;  but  it  was 
agreed  that  the  banks  should  be  the  medium  of  popular  sub- 
scriptions through  which  the  burden  was  to  be  transferred  to 
private  lenders.  The  inherent  difficulty  of  carrying  out  the 
plan  was  great ;  and  it  was  increased  by  differences  as  to  the 
meaning  of  the  agreement  between  the  government  and 
banks.  In  order  to  prevent  the  removal  of  a  large  volume  of 
money  from  the  channels  of  business,  the  banks  desired  that 
the  funds  which  they  loaned  to  the  government  should  remain 
in  their  custody  until  checked  out  by  the  government  to  meet 
current  disbursements.  This  meant,  of  course,  that  the  banks 
would  be  permitted  to  use  their  notes  in  the  payment  of 
treasury  checks.  Under  the  sub-treasury  act  only  coin  was 
receivable  by  the  treasury,  but  the  existing  public  distrust  had 
caused  hoarding,  and  there  was  a  relatively  small  amount  of 
specie  then  available  in  the  country ;  hence  the  transfer  of  so 
large  a  sum  as  $150,000,000  in  gold  was  regarded  by  many 
experts  as  impracticable.  It  was  indeed  asserted  that  the  act 
of  August  5,  1 86 1  (amending  the  loan  act  of  July  17),  in  allow- 
ing "  the  secretary  of  the  treasury  to  deposit  any  of  the  moneys 
obtained  on  any  of  the  loans  now  authorized  by  law,  to  the 
credit  of  the  treasurer  of  the  United  States,  in  such  solvent 
specie-paying  banks  as  he  may  select,"  was  intended  to  give 
the  secretary  elastic  powers  to  receive  bank  bills  or  book 
credit  in  place  of  coin.  James  Gallatin,  representing  some 
New  York  banks,  declared  "  that  this  provision  was  particu- 
larly intended  to  authorize  drafts  for  disbursements  against 
the  deposits  created  by  the  taking  of  loans."  The  secretary, 
however,  strictly  construed  the  sub-treasury  bill  and  insisted 
that  the  banks  should  make  their  settlements  in  specie. 

Another  ground  of  remonstrance  by  bankers  was  Chase's 
free  use  of  his  power  to  issue  demand  notes ;  these  notes  were 
legal  tender  for  the  payment  of  public  dues,  and  if  they  went 
largely  into  circulation  the  banks  would  naturally  receive  less 


280  Civil  War;   Legal  Tenders.        [§  120 

gold  in  their  daily  business  transactions,  and  thus  would  be 
less  able  to  fulfil  their  loan  agreement  with  the  government. 
Some  bankers  asserted  that  the  secretary  had  promised  not  to 
use  this  power.  At  first  the  notes  were  issued  with  mod- 
eration, but  in  November  the  secretary  gave  way  to  what  he 
considered  the  imperative  claims  of  the  treasury  and  put 
out  notes  freely,  on  the  ground  that  Congress  had  ordered 
appropriations  beyond  those  estimated  in  the  summer,  and 
that  the  revenues  from  imports  did  not  come  up  to  the  esti- 
mates ;  he  saw  no  other  relief.  In  spite  of  the  differences  of 
opinion,  banks  for  a  time  continued  to  co-operate  with  the 
treasury  department  in  carrying  out  the  original  agreement  for 
the  purchase  of  bonds. 

When  Congress  met  in  December,  186 1,  the  secretary  in 
his  regular  annual  report  was  obliged  to  revise  the  estimates  of 
July,  and  to  ask  Congress  for  further  means  ;  he  now  estimated 
that  taxation  would  yield  less  than  was  originally  expected,  and 
that  appropriations  would  be  larger  by  $214,000,000.  Once 
more  the  secretary  attempted  to  apply  his  principle  of  a  proper 
balance  between  taxation  and  loans  without  a  radical  increase 
in  taxes.  He  recommended  a  slight  increase  in  customs 
duties,  a  readjustment  of  the  direct  taxes  so  that  the  loyal 
States  should  pay  all  of  the  $20,000,000  ;  and  the  imposition 
of  slight  internal  revenue  duties,  which,  including  the  income 
tax,  would  yield  $30,000,000.  The  secretary,  like  many  other 
statesmen,  still  entertained  the  hope  that  the  war  might  be 
brought  to  an  auspicious  termination  before  midsummer. 

In  connection  with  a  request  for  authority  to  make  further 
loans  of  $200,000,000  the  secretary  advanced  his  first  propo- 
sals for  a  national  banking  system.  He  believed  that  the 
time  had  come  when  Congress  should  exercise  its  authority 
over  the  credit  circulation  of  the  country.  He  thought  his 
plan  would  give  the  following  advantages:  (1)  uniformity  of 
circulation,  in  place  of  a  bank-note  circulation  dependent  on 
the  laws  of  34  States  and  1600  private  corporations;  (2)  an 
increased  security  to  the  Union,  because  of  a  common  interest 


§  121]      Suspension  of  Specie  Payments.        281 

created  by  the  disposition  of  national  securities  as  a  basis  of 
circulation ;  (3)  the  safest  currency  the  country  had  ever 
enjoyed.  Little  emphasis  was  laid  on  the  special  demand  for 
United  States  stock  as  a  basis  of  bank  circulation,  but  this 
advantage  evidently  was  a  strong  reason  for  making  the  recom- 
mendation. Chase  did  not  refer  to  the  recent  controversy 
with  the  banks,  nor  did  he  specially  discuss  the  issue  of  the 
demand  notes ;  on  the  general  question  of  government  paper 
currency  he  did  call  attention  to  the  inconveniences  and 
hazards  of  the  issue  of  United  States  notes,  possibly  ending  in 
the  "  immeasurable  evils  of  dishonest  public  faith  and  national 
bankruptcy." 

121.     Suspension  of  Specie  Payments. 

Although  the  secretary  did  not  officially  take  notice  of  the 
growing  embarrassments  of  the  banks,  bankers  found  them 
very  serious ;  and  on  December  30,  under  the  lead  of  the 
New  York  City  banks,  specie  payments  were  suspended 
throughout  the  country  ;  and  this  action  was  speedily  followed 
by  the  government.  This  sudden  and  eventful  shock  to  pri- 
vate and  public  credit  has  been  the  subject  of  much  contro- 
versy. Chase  declared  that  suspension  was  inevitable,  because 
of  unexpected  military  reverses,  increased  expenditures,  and 
diminished  confidence  in  public  securities ;  and  in  this 
conclusion  Republican  leaders  of  the  time  acquiesced  ;  they 
denied  that  the  issue  of  demand  notes  in  any  way  caused 
suspension,  since  only  $33,460,000  was  in  circulation  at  the 
date  of  suspension,  and  up  to  that  day  every  note  presented 
for  payment  had  been  promptly  redeemed  in  coin. 

On  the  other  hand  the  bankers  declared  that  the  two 
reasons  for  suspension  were  first,  the  pressures  on  banks  because 
they  were  not  allowed  to  retain  the  government  deposits 
received  in  the  loan  operations  until  they  were  actually 
needed ;  and  second,  the  banks  were  expected  by  their 
customers  to  receive  the  government  demand  notes  for  de- 
posit, and  permit  them  to  be  drawn  against  in  coin;  and  such 


282  Civil  War;   Legal  Tenders.        [§  121 

a  burden  the  banks  affirmed  was  too  heavy  to  carry.  They 
therefore  laid  upon  Chase  the  responsibility  for  the  suspension 
of  specie  payments :  first,  because  he  forced  the  banks  to 
transfer  the  principal  of  the  loans  to  the  government  without 
giving  them  the  advantage  of  retaining  the  funds  temporarily 
on  deposit ;  and,  secondly,  because  the  banks  were  obliged  to 
sustain  the  credit  of  the  demand  notes  as  well  as  the  bank- 
notes. It  has  even  been  declared  that  the  banks  were  sacrificed 
on  the  altars  of  their  own  patriotism,  and  that  Chase  had  a 
wild  idea  of  locking  up  the  funds  thus  secured  until  needed 
for  expenditure,  so  as  to  make  a  broader  field  for  the  circulation 
of  United  States  demand  notes.1 

A  fair  judgment  on  this  important  question  will  be  aided 
by  carefully  considering  the  legislation  which  bears  on  the 
subject.  In  1861  the  law  provided  :  (1)  that  the  sub- treasury 
should  receive  and  pay  out  only  coin  or  government  notes ; 
(2)  that  the  treasury  could  deposit  with  such  specie-paying 
banks  as  might  be  selected  any  of  the  moneys  obtained  from 
the  new  loans.  Mr.  Horace  White  believes  that  the  act  of 
August  5,  1861,  "suspended  the  operation  of  the  sub-treasury 
act  so  as  to  allow  the  secretary  to  deposit  public  money  in 
solvent  specie-paying  banks  and  to  withdraw  it  at  his  own 
convenience  and  pleasure  for  the  payment  of  public  debts. 
In  short,  he  was  permitted  to  handle  the  proceeds  of  the 
three  loans  in  whatsoever  way  he  pleased."  Possibly  it  may 
have  been  the  intention  in  framing  the  law  of  August  5  to 
permit  the  banks  to  pay  in  notes  as  well  as  to  receive  deposits 
from  the  government,  but  it  is  not  clearly  expressed,  and  in  the 
opinion  of  some,  as  for  instance  John  Sherman,  the  secretary 
could  hardly  have  acted  other  than  he  did  without  laying 
himself  open  to  the  charge  of  ignoring  the  law.2  Against 
this  opinion  it  may  at  least  be  admitted,  without  attempt- 
ing to  locate  the  blame,  that  the  first  material  mistake  in 
the   management    of  the   war   finances    occurred   when    the 

1  Cong.  Rec,  Feb.  9,  1895,  P-  220°- 

2  John  Sherman,  Recollections,  vol.  i,  p.  269. 


§  121]      Suspension  of  Specie  Payments.       283 

government  declined  to  use  the  bank  check  and  the  clearing- 
house. 

The  real  explanation  of  the  financial  crisis  of  December, 
1 86 1,  is  not  to  be  found  either  in  errors  of  the  treasury  or  in 
the  selfishness  of  the  banks,  but  in  the  condition  of  public  feel- 
ing and  a  lack  of  confidence  in  the  success  of  the  war.  The 
credit  of  the  government  was  undoubtedly  injured  by  the 
failure  of  Chase  to  recommend  or  of  Congress  to  enact  a  far- 
reaching  system  of  taxation,  and  the  recent  Trent  affair  caused 
an  apprehension  of  international  difficulty  with  England. 
Because  there  was  little  indication  that  the  credit  of  the  govern- 
ment was  to  be  supported  by  vigorous  taxation,  the  banks  were 
handicapped  in  their  efforts  to  sell  bonds  to  investors.  Deposi- 
tors were  also  withdrawing  funds  from  the  banks  for  hoarding,  so 
that  the  specie  reserve  was  slipping  away.  On  January  1,  1862, 
the  banks  had  but  $87,000,000  of  specie  to  meet  $459,000,000 
of  indebtedness.  It  would  have  been  impossible  to  go 
through  a  war  on  the  basis  of  a  currency  system  so  inadequate. 

The  demand  notes  not  only  irritated  the  banks,  they  also 
held  an  important  relation  in  subsequent  discussion  to  the  legal 
tenders  and  the  agitation  for  fiat  money.  After  the  suspension 
of  specie  payments  these  notes  which  were  receivable  for  all 
public  dues,  circulated  at  a  premium  over  State  bank-notes 
and  also  over  the  treasury  notes  or  greenbacks,  which  were 
issued  in  the  following  year  but  were  not  made  receivable  for  cus- 
toms. Hence  it  has  been  argued  that  the  greenback  circula- 
tion issued  in  1862  might  have  been  kept  at  par  with  gold  if  it. 
too,  had  been  made  receivable  for  all  payments  to  the  govern- 
ment, as  well  as  given  a  legal-tender  quality  for  settling  private 
debts.  The  depreciation  of  the  greenback  is  thus  ascribed  to 
the  fact  that  it  was  not  given  the  fullest  credence  and  honor 
by  the  fiat  of  the  government.  The  premium  for  the  demand 
notes  was,  however,  not  due  solely  to  their  receivability  in 
payment  of  duties  ;  other  causes  had  influence,  such  as  the 
joint  effect  of  the  limitation  upon  their  quantity  and  the 
prohibition  of  reissue. 


284  Civil  War;   Legal  Tenders.        [§  122 

122.    Issue  of  Legal-Tender  Notes. 

The  recommendations  of  Secretary  Chase  in  his  report  of 
December,  1861,  were  referred  to  the  committee  on  ways 
and  means,  and  by  it  to  a  sub-committee  of  which  E.  G. 
Spaulding  of  New  York  was  chairman ;  in  due  time  the 
sub-committee  prepared  a  bill  which  resulted  in  the  act  of 
February  25,  1862,  one  of  the  landmarks  in  the  history  of 
American  finance.  Its  main  provisions  are  as  follows  :  ( 1 ) 
the  issue  of  $150,000,000  of  legal-tender  United  States  notes 
(including  the  demand  notes  already  authorized,  in  denomina- 
tions of  not  less  than  §5)  ;  (2)  the  issue  of  $500,000,000  of 
bonds  (familiarly  known  as  five-twenties,  redeemable  after  five 
years  and  payable  in  twenty  years)  bearing  6  per  cent,  inter- 
est, to  be  sold  at  market  value  for  coin  or  treasury  notes ; 
(3)  the  issue  of  certificates  of  deposit  bearing  5  per  cent, 
interest,  in  exchange  for  United  States  notes  left  on  deposit 
not  less  than  thirty  days,  and  to  an  amount  not  exceeding 
$25,000,000,  payable  after  ten  days'  notice;  (4)  the  creation 
of  a  sinking-fund. 

No  more  striking  illustration  of  the  unsympathetic  relations 
of  a  cabinet  minister  with  the  legislative  branch  can  be  found  in 
the  range  of  fiscal  history  ;  the  act  does  not  so  much  as  mention 
the  national  banking  system  advocated  by  the  secretary,  but  it 
does  authorize  legal-tender  notes,  which  the  secretary  had  not 
suggested  and  to  which  he  was  at  heart  opposed.  The  suspen- 
sion of  specie  payments  which  occurred  after  the  submission  of 
the  secretary's  report  had  in  a  measure  changed  the  situation  ; 
but,  with  all  allowances  possible,  the  history  of  the  legal-tender 
act  is  a  remarkable  commentary  upon  the  methods  of  financial 
legislation  at  this  period.  The  account  of  Spaulding,  chairman 
of  the  sub-committee,  is  that  he  applied  to  Chase  for  details  on 
a  new  system  of  bank  currency ;  inasmuch  as  the  secretary  did 
not  promptly  respond  with  a  bill,  he  himself  began  the  prep- 
aration of  a  measure  such  as  he  thought  the  treasury  depart- 
ment   desired,    but    while    engaged    upon    it   came    to    the 


§122]       Issue  of  Legal-Tender  Notes.  285 

conclusion  that  it  could  not  be  made  available  quickly  enough 
to  meet  the  crisis.  "  A  system  of  national  banks  could  not 
be,  organized  and  put  in  effective  force  for  more  than  a  year, 
and  in  the  mean  time  the  State  banks  would  be  in  a  condition 
of  suspension,  without  coin  or  the  possibility  of  obtaining  it, 
and  we  need  effective  money."  He  saw  that  no  tax  legislation 
could  be  promptly  effective ;  hence  he  drafted  a  section  au- 
thorizing legal-tender  notes,  which  was  later,  on  January  7, 
1862,  submitted  to  Congress  as  a  separate  bill. 

At  first  great  opposition  appeared  throughout  the  country ; 
the  metropolitan  press,  with  two  exceptions,  denounced  it, 
and  committees  representing  the  State  banks  hastened  to 
Washington  to  set  forth  their  objections  and  to  propose  another 
project  involving  an  increase  in  taxation,  an  issue  of  non-legal- 
tender  two-year  treasury  notes,  the  use  of  banks  as  deposito- 
ries of  public  funds,  and  the  sale  of  bonds  without  limitation  as 
to  price.  The  bankers'  plan,  however,  ran  counter  to  popular 
convictions  ;  it  was  virtually  an  abandonment  of  the  sub-treasury 
system,  against  which  there  was  no  longer  opposition ;  and 
it  was  a  plan  of  carrying  on  the  operations  of  the  government 
by  banks  over  which  Congress  had  no  control  and  which 
could  issue  money  without  limit  so  far  as  national  laws  affected 
it.  It  was  furthermore  shown  that  in  the  loyal  States  the 
bank  circulation  of  January  1,  1862,  was  only  $132,000,000; 
that  this  was  diffused  throughout  the  country  and  was  not 
sufficient  for  the  purpose  of  negotiating  the  loans  which  were 
required ;  and  finally  that  there  was  popular  opposition  to 
selling  bonds  below  par.  Nor  did  the  bankers'  scheme  appeal 
to  the  leaders  of  the  political  party  which  had  breathed  deep  of 
the  spirit  of  national  sovereignty.  Banks  were  referred  to  as 
"  usurers  "  and  "  note-shavers  ;  "  "  shinning  "  by  the  government 
through  Wall  street  was  strongly  condemned ;  and  the  gov- 
ernment was  advised  to  "nerve  up."  "Why,  then,  go  into 
the  streets  at  all  to  borrow  money?  "  "  I  prefer  to  assert  the 
power  and  dignity  of  the  government  by  the  issue  of  its  own 
notes."     "  To  render  the  government  financially  more  inde- 


286  Civil  War;   Legal  Tenders.         [§  122 

pendent,  it  is  necessary  to  make  the  United  States  notes  a 
legal  tender." 

The  debate  opened  January  28.  Originally  Mr.  Spauld- 
ing's  bill  proposed  the  issue  of  only  $100,000,000  of  legal- 
tender  notes,  but  the  idea  once  planted  grew  with  rapidity. 
Chase  was  reluctant  to  accept  the  measure,  but  day  by  day 
as  the  immediate  needs  of  the  country  became  more  pressing 
and  legislation  lingered  his  opposition  faded  away.  Never- 
theless the  measure  did  not  pass  the  House  without  earnest 
protests,  based  both  upon  the  unconstitutionality  of  the 
measure  and  upon  the  economic  disasters  it  would  entail. 
"  If  it  be  a  war  measure,"  said  Morrill,  "  it  is  a  measure 
which  will  be  of  greater  advantage  to  the  enemy.  I  would  as 
soon  provide  Chinese  wooden  guns  for  the  army  as  paper  money 
alone  for  the  army.  It  will  be  a  breach  of  public  faith.  It 
will  injure  creditors  ;  it  will  increase  prices ;  it  will  increase 
many  fold  the  cost  of  the  war."  This  view  was  supported 
in  many  quarters  and  the  government  was  assured  that  those 
who  had  sent  their  sons  to  the  conflict  would  even  more 
willingly  lend  their  credit. 

In  the  Senate  the  bill  was  supported  by  Senator  Sherman  in 
a  speech  the  burden  of  which  may  stand  as  typical  of  the 
current  argument :  he  said  that  every  organ  of  financial 
opinion  in  the  country  was  agreed  as  to  the  necessity  of  a  legal- 
tender  clause  if  the  issue  of  demand  notes  was  authorized  ; 
its  necessity  had  been  declared  by  the  secretary  of  the 
treasury,  the  Chambers  of  Commerce  of  New  York,  Boston, 
and  Philadelphia,  the  Committee  of  Public  Safety  of  New 
York,  and  in  fact  by  almost  every  recognized  organ  of  finan- 
cial opinion  in  the  country;  $100,000,000  was  immediately 
due  to  the  army  and  $250,000,000  was  due  by  July  1  ;  the 
banks  had  exhausted  their  capital  in  making  loans  ;  money 
could  not  be  borrowed  except  at  great  sacrifice ;  there  was  no 
money  to  buy  bonds ;  gold  and  silver  had  ceased  to  circu- 
late ;  legal-tender  currency  was  necessary  to  aid  in  making 
further  loans ;  without  the  legal-tender  clause  the  notes  pro- 


§122]       Issue  of  Legal-Tender  Notes.  287 

posed  to  be  issued  would  fall  dead  upon  the  money  market ; 
with  it  the  notes  will  be  the  life-blood  of  the  business  of  the 
country;  the  issue  of  $150,000,000  cannot  do  harm;  it  is 
only  a  mere  temporary  expedient.  "  As  a  member  of  this  body, 
I  am  armed  with  high  powers  for  a  holy  purpose,  and  I  am 
authorized  —  nay,  required  —  to  vote  for  the  laws  necessary 
and  proper  for  executing  these  high  powers,  and  to  accom- 
plish that  purpose.  This  is  not  the  time  when  I  would  limit 
these  powers.  Rather  than  yield  to  revolutionary  force  I 
would  use  revolutionary  force."  If  soldiers  were  to  be  com- 
pelled to  take  these  notes  as  money,  every  one  else  should  be 
compelled  to  take  them.  Sherman's  main  argument  was  that 
of  necessity  —  necessity  to  meet  the  immediate  obligations 
of  government ;  necessity  to  give  currency  to  treasury  notes ; 
necessity  to  provide  money  which  would  in  turn  purchase 
bonds  ;  he  was  willing  to  leave  the  question  of  constitution- 
ality to  the  courts. 

The  bill  passed  the  House  by  a  vote  of  93  to  59 ;  in  the 
Senate  it  was  considerably  modified.  The  House  provision 
that  the  treasury  notes  should  be  receivable  for  taxes,  debts, 
and  demands  of  all  kinds  due  to  the  United  States  and  all 
debts  and  demands  owing  by  the  United  States  was  amended 
by  requiring  that  duties  on  imports  should  be  paid  in  coin, 
and  that  the  interest  on  the  bonds  to  be  sold  should  be  pay- 
able in  coin.  The  Senate  also  added  the  sections  authorizing 
the  sale  of  bonds,  the  issue  of  certificates  of  deposit,  and  the 
establishment  of  a  sinking  fund.  "These  amendments,"  says 
Senator  Sherman,1  "  were  considered  of  prime  importance. 
It  was  felt  that  the  duty  on  imported  goods  should  not  be 
lessened  by  any  depreciation  of  our  local  currency.  Such 
importations  were  based  upon  coin  value,  and  the  tax  levied 
upon  them  was  properly  required  to  be  paid  in  coin.  This 
security  of  coin  payment  would  enable  the  government  to  sell 
the  bonds  at  a  far  higher  rate  than  they  would  have  com- 
manded without  it ;  and  tended  also  to  limit  the  depreciation 

1  Recollections,  vol.  i,  p.  275. 


288  Civil  War  ;   Legal  Tenders.         [§  l22 

of  United  States  notes,"  which  were  convertible  into  bonds. 
The  majority  in  the  Senate  was  overwhelming,  the  vote  being 
30  to  7. 

The  act  says  nothing  as  to  time  of  repayment  of  the 
legal-tender  notes  and  makes  no  pledge  against  further  issue. 
A  most  important  clause  permitted  the  conversion  of  the 
legal-tender  notes  into  five-twenty  bonds ;  for  it  was  argued 
that  holders  of  notes  would  instinctively  desire  to  exchange 
them  for  interest-bearing  bonds ;  and  upon  reissue  by  the 
government  they  could  be  again  exchanged  for  bonds.  Ac- 
cording to  Stevens,  this  process  would  operate  with  such  magic 
that  the  $500,000,000  of  bonds  authorized  would  be  subscribed 
before  the  government  could  use  the  funds;  $150,000,000  of 
paper  notes  would  do  the  work  of  $500,000,000  in  bonds  ! 

The  first  step  was  soon  repeated ;  in  little  more  than  three 
months,  because  of  the  inability  of  the  government  to  borrow 
on  the  terms  authorized,  and  the  tardy  effect  of  new  taxes, 
Secretary  Chase  asked  for  another  issue  of  legal  tenders,  a 
part  of  which  should  be  in  denominations  of  less  than  five  dollars. 
Congress  quickly  assented  by  the  act  of  July  n,  1862,  pro- 
viding for  the  issue  of  another  $150,000,000,  of  which 
$35,000,000  should  be  in  denominations  less  than  five  dol- 
lars but  not  less  than  one  dollar.  On  January  17,  1863,  a 
third  issue  of  $100,000,000  was  authorized,  increased  March 
3  to  $150,000,000,  all  of  which  might  be  in  denominations 
of  one  dollar  or  over.  By  this  time  opposition  had  practically 
disappeared  in  Congress,  for  in  the  House  the  last  bill  passed  to 
its  third  reading  on  the  same  day  that  it  was  presented,  and  in  the 
Senate  concurrence  was  secured  on  the  following  day  by  a  vote 
of  38  to  2.  Provision  was  made  for  the  reissue  of  the  new 
notes  but  not  for  their  conversion  into  bonds ;  and  the  right 
of  conversion  for  previous  issues  was  to  cease  on  July  1,  1863. 
Of  the  $450,000,000  authorized  under  the  three  acts  named, 
$431,000,000  was  actually  outstanding  on  June  30,  1864. 
This  was  the  end  of  emissions  of  non-interest  legal-tender 
notes ;  these  issues  were  supplemented  by  fractional  currency 


§  i22j       Issue  of  Legal-Tender  Notes.  289 

and  by  interest-bearing  notes  running  for  a  brief  period,  both 
of  which  classes  were  endowed  with  the  legal-tender  quality. 

No  subject  in  American  finance  has  been  more  controverted 
than  the  exact  degree  of  Secretary  Chase's  responsibility  for 
the  issue  of  legal  tenders.  That  Mr.  Chase  was  no  friend 
of  paper  money  is  easily  proven ;  by  private  experience,  politi- 
cal training,  and  conviction  he  shared  in  a  distrust  of  the 
local  banking  associations.  When  entering  upon  the  duties 
of  governor  of  Ohio  in  1856,  he  referred  to  all  mere  paper- 
money  systems  as  pregnant  with  fraud,  justly  incurring  univer- 
sal reproach.  In  his  report  of  July,  1861,  he  recognized  in 
plain  language  the  danger  in  the  issue  of  demand  notes ;  he 
made  no  suggestion  of  legal  tenders  in  his  report  of  December, 
1 86 1  ;  and  it  was  with  great  reluctance  that  he  accepted  the 
plan  formulated  during  the  next  few  weeks  by  Spaulding's  sub- 
committee. Chase  was  governed  by  "public  exigency."  On 
January  22  he  regretted  "exceedingly  that  it  is  found  neces- 
sary to  resort  to  the  measure  of  making  fundable  notes  of  the 
United  States  a  legal  tender  "  ;  on  January  29  it  was  his  "  anxious 
wish  to  avoid  the  necessity  of  such  legislation  " ;  if,  however, 
United  States  notes  be  issued,  "  discriminations  should  if  pos- 
sible be  prevented ;  and  the  provision  making  the  notes  a 
legal  tender  in  a  great  measure  at  least  prevents  it,  by  putting 
all  citizens  in  this  respect  on  the  same  level,  both  of  rights 
and  duties  "  ;  and  on  February  5  he  insisted  that  "  it  is  very 
important  that  the  bill  should  go  through  to-day,  and  through 
the  Senate  this  week.  The  public  exigencies  do  not  admit  of 
delay."  He  probably  did  not  expect  that  the  notes  would 
remain  in  permanent  circulation,  since  they  were  made  con- 
vertible into  the  five-twenty  bonds.  Further  proof  of  his  innate 
dislike  of  the  system  may  be  found  in  his  successive  annual 
reports  urging  a  limitation  on  the  issues,  and  finally  in  the 
notable  decision  delivered  in  1869,  when  as  chief  justice  he 
declared  that  the  legal-tender  clause  was  unconstitutional. 

The  critics  of  Chase,  however,  assert  that  if  he  was  so  re- 
luctant to  issue  notes,  his  political  and  moral  responsibility 

19 


290  Civil  War;   Legal  Tenders.         [§  123 

was  so  much  the  greater ;  that  his  opposition  to  legal  tenders 
was  weak-hearted ;  an  able  financier  should  not  have  accepted 
with  reluctance  a  proposition  which  he  thought  alarming, 
but  should  have  aggressively  fought  it  to  the  end.  A  bolder 
opponent  of  legal-tender  paper  money  if  pressed  too  hard  by 
an  impatient  Congress  would  at  least  have  used  every  agency 
in  his  power  to  avoid  a  second  issue  :  he  would  have  insisted 
on  more  taxation,  and  the  selling  of  bonds  for  what  they  would 
bring ;  he  would  for  the  time  being  have  smothered  his  an- 
tagonism to  local  banks,  and  accepted  the  conclusion  that  a 
great  struggle  for  national  preservation  and  national  credit 
was  not  the  time  for  reforming  the  paper  currency  by  bringing 
forward  a  scheme  of  national  banking. 

To  such  an  arraignment  an  answer  may  be  found  in  a 
passage  of  the  report  of  Fessenden,  the  successor  of  Chase,  in 
December,  1864:  "It  is,  in  the  secretary's  judgment,  not 
only  difficult  but  impossible  to  apply  fixed  rules  to  a  condition 
of  affairs  constantly  changing,  or  to  meet  contingencies  which 
no  human  reason  can  foresee  by  a  steady  application  of  gen- 
eral laws,  especially  in  a  government  and  with  a  people  where 
public  opinion  is  the  controlling  element,  and  that  opinion  is 
not  under  the  direction  of  those  who  may  happen  to  admin- 
ister public  affairs.  Accordingly  it  has  been  seen  that  the 
attempt  to  conduct  financial  operations  on  so  immense  a  scale, 
upon  a  strict  specie  basis,  soon  proved  impracticable." 

123.    Convertibility  of  the  Greenback. 

The  details  of  the  loans  and  taxation  during  the  war  may 
be  postponed  to  another  chapter,  but  it  is  advisable  here  to 
carry  the  history  of  the  legal  tenders  down  to  the  end  of  the 
war,  and  to  describe  some  of  the  economic  results  of  the 
system.  In  the  first  place,  it  is  to  be  observed  that  the 
first  two  issues  of  legal-tender  notes  were  fundable  within 
five  years  at  the  option  of  the  holder  into  6  per  cent,  gold 
bonds ;  this  privilege  was  an  indirect  method  of  redeeming 


§  123]    Convertibility  of  the  Greenback.      291 

the  notes  by  turning  them  into  the  most  valuable  and  best 
protected  form  of  government  indebtedness  founded  on  a 
specie  support.  Within  a  year,  however,  Chase  objected  to 
the  option  thus  given  to  the  holder  of  the  note  on  the  ground 
that  it  restricted  the  treasury  in  the  sale  of  bonds.  Obviously 
it  would  be  impossible  to  sell  bonds  bearing  a  lower  rate  of 
interest,  as  he  believed  he  could,  so  long  as  6  per  cent, 
bonds  could  be  had  through  the  funding  of  legal-tender  notes. 
In  view  of  his  objections  the  act  of  March  3,  1863,  made  no 
provision  for  conversion  of  the  third  series  of  legal  tenders, 
and  even  changed  the  contract  expressed  in  the  previous 
issues  by  requiring  that  the  right  to  exchange  notes  already 
issued  for  bonds  should  be  exercised  before  July  1  of  that 
year.  The  note-holders  made  little  protest  and  the  serious 
results  of  this  shifting  of  conditions  were  not  recognized  until 
afterwards.  Spaulding,  who  took  so  important  a  part  in  the 
original  legal-tender  legislation,  regarded  this  change  of  policy 
as  the  greatest  mistake  of  the  war ;  for  legal-tender  notes  were 
a  forced  loan  from  the  people  to  the  government,  and  the 
former  were  protected  as  long  as  the  lender  had  the  option  of 
promptly  converting  the  notes  into  a  loan  at  a  fair  rate  of  inter- 
est. After  the  act  of  March  3,  1863,  the  previous  standard  of 
value  as  measured  in  bonds  was  destroyed,  and  this  led  to  an 
advance  in  the  price  of  gold  expressed  in  commodities  and 
services.  Senator  Sherman  in  1876  declared  that  this  altera- 
tion was  a  most  fatal  step,  and  for  his  part  in  acquiescing  in 
and  voting  for  it  he  felt  more  regret  than  for  any  other  act 
of  his  official  life.  Although  the  supporters  of  the  adminis- 
tration maintained  that  there  was  no  right  which  could  not  be 
barred  by  a  statute  of  limitation,  it  was  justly  held  that  the 
credit  of  the  government  had  suffered  by  this  paltering  with 
the  public  faith  ;  and  Chase  so  far  recognized  the  obligation  as 
to  allow  the  exchange  to  continue  until  the  beginning  of  the 
year  1864. 

The  most  serious  effect  of  this  suspension  of  convertibility 
was  seen  at  the  close  of  the  war  ;  under  the  original  conditions 


292  Civil  War;   Legal  Tenders.         [§  124 

the  legal-tender  notes  would  have  eventually  returned  to  the 
treasury  to  be  exchanged  for  gold-bearing  bonds,  and  con- 
traction of  the  currency  would  have  proceeded  according  to 
economic  law,  instead  of  being  subjected  to  the  rigid  formulae 
of  statutes,  or  to  the  vacillating  policy  of  an  administrative 
secretary.  On  the  other  hand,  after  the  credit  of  the  govern- 
ment so  advanced  that  the  bonds  rose  in  market  value  above 
par  in  greenbacks,  the  government  got  the  advantage  of  sales 
at  a  premium  or  the  equal  advantage  of  placing  bonds  at  a 
lower  rate  of  interest ;  this  advantage,  however,  could  not 
compensate  for  the  indirect  disadvantages  of  the  greenbacks 
in  weakening  the  assets  of  the  treasury,  nor  for  the  subsequent 
unsteadiness  of  the  standard  of  values. 

124.    Depreciation  of  the  Greenback. 

The  economic  results  of  the  successive  issues  of  the  legal- 
tender  United  States  notes,  accompanied  by  enormous  issues 
of  short-term  treasury  notes  which  circulated  almost  as  money, 
make  a  chapter  of  monetary  history  and  experience  too 
long  for  this  work.  The  difficulty  of  clear  comprehension 
is  increased  by  the  rapid  expansion  during  the  same  period 
of  local  bank  circulation,  which  added  to  the  inflation.  The 
two  most  distinct  consequences  to  the  government  were  :  the 
rise  of  prices  of  commodities,  and  the  fluctuating  premium 
on  gold.  The  first  greatly  increased  the  cost  of  the  war, 
and  the  second  seriously  disturbed  the  operations  of  the 
treasury,  which  was  especially  interested  in  stable  quotations 
of  specie  because  on  the  one  side  it  received  gold  for  cus- 
toms and  on  the  other  hand  it  paid  it  out  in  interest  on  its 
bonds. 

The  depreciation  of  the  currency,  measured  in  gold,  is  seen 
in  the  following  table,  which  gives  by  months,  1 862-1 865,  the 
average  gold  price  of  one  hundred  dollars  in  currency  in  the 
New  York  market :  — ■ 


§  i24]     Depreciation  of  the  Greenback.       293 


Month 

1862 

1863 

1864 

1865 

January 

$98 

$69 

*64 

$46 

February 

97 

62 

63 

49 

March 

98 

65 

61 

57 

April 

98 

66 

58 

67 

May 

97 

67 

57 

74 

June 

94 

69 

47 

7» 

July 

87 

77 

39 

70 

August 

87 

79 

39 

70 

September 

84 

74 

45 

69 

October 

78 

68 

48 

69 

November 

76 

68 

43 

68 

December 

76 

66 

44 

68 

The  other  index  of  depreciation  is  found  in  the  general  rise 
of  prices ;  this  cannot  be  attributed  alone  to  the  issue  of 
paper  currency  ;  other  factors  were  at  work,  such  as  increased 
taxation  and  the  insatiable  consumption  of  provisions  and 
materials  of  war.  We  cannot  take  the  premium  on  gold  as 
measuring  the  difference  between  actual  prices  and  the  prices 
which  would  have  existed  if  the  country  had  remained  on  a 
gold  basis,  for  the  premium  varied  sharply  from  day  to  day, 
according  to  the  progress  of  the  war,  the  movements  of  foreign 
trade,  or  the  manipulations  of  speculators  ;  while  the  changes 
in  prices  moved  sluggishly.  When  allowance  is  made  for  all 
the  special  factors  there  was  an  undoubted  rise  in  general 
prices  which  can  only  be  accounted  for  by  the  existence  of  a 
large  volume  of  depreciated  currency.  The  total  effect  of 
paper  issues  in  increasing  the  cost  of  the  war  has  been  esti- 
mated at  between  $528,000,000  and  $600,000,000;  even 
this  large  amount  is  small  when  compared  with  the  burdens 
which  inflated  prices  placed  upon  the  people  in  the  ordinary 
relations  of  trade  and  industry. 

True  to  the  general  law  that  wages  of  labor  do  not  respond 
to  economic  forces  as  promptly  as  prices  of  commodities,  sta- 
tistical inquiry  shows  that  the  depreciated  value  of  the  money 
medium  during  the  Civil  War  was  not  reflected  in  an  equal 
measure  by  an  increase  of  money  wages.  The  relative  course 
of  prices  and  money  wages  has  been  computed  in  the  "  Aldrich 
Report  "  as  follows  :  — 


294  Civil  War;   Legal  Tenders.         [§  125 


Year 

Prices 

Money  wages 

i860 

1000 

1 00.0 

1861 

100.6 

100.8 

1862 

117.8 

102.9 

1863 

148.6  • 

110.5 

1864 

190.5 

125.6 

1865 

216.8 

143- 1 

As  the  purchasing  power  of  earnings  was  greatly  diminished 
a  heavy  load  was  placed  upon  the  laborers  of  the  country. 
The  government  was  the  largest  employer  of  labor  in  work- 
men, clerks  and  soldiers ;  but  the  government]  rarely  makes 
changes  in  its  salaries  or  pay,  and  hence  did  not  feel  the 
full  effect  of  the  increase  in  wages  which  took  place  in  the 
individual  field  of  labor.  Of  course  government  officials 
complained  because  the  increased  cost  of  living  was  out  of 
proportion  to  income ;  and  some  of  the  best  trained  and  most 
competent  employees  left  the  public  service.  The  wages  of 
soldiers,  from  the  beginning  of  the  war,  long  remained  at  $13 
a  month,  although  prices  had  about  doubled  by  1864.  The 
distress  indeed  became  so  great  that  Congress  on  May  1,  1864, 
advanced  the  pay  to  $16  per  month  in  currency.  This  was  no 
great  relief,  since  after  the  increase  prices  continued  to  rise. 
Artisans  were  forced  to  make  similar  sacrifices ;  the  depre- 
ciated currency  in  its  final  consequences  affected  every  wealth 

producer. 

125.    Gold  Premium. 

Another  important  consequence  of  the  suspension  of  specie 
payments  was  the  fluctuating  premium  on  gold  caused  by  the 
demand  for  specie  as  a  commercial  commodity.  Gold  was 
required  in  large  quantities  for  three  purposes :  by  the  gov- 
ernment for  the  payment  of  interest  on  bond  issues ;  by 
importers  to  pay  customs  duties ;  and  by  bankers  to  settle 
balances  due  abroad.  The  stock  of  gold  in  the  country  in 
1 86 1  was  not  large,  and  was  speedily  lessened  by  the  exten- 
sion of  paper  issues  and  by  unfavorable  balances  of  trade,  due 
to  the  sale  of  American  securities  by  foreign  holders  and  the 


§  125]  Gold  Premium.  295 

decline  of  important  exports.  During  1862  the  fluctuations 
in  the  quotations  of  gold  in  paper  currency  ranged  between 
102  and  132;  in  1863  between  125  and  160;  and  in  1864 
between  155  and  285.  The  political  and  economic  factors 
which  occasioned  these  varied  changes  were  many  and  have 
been  exhaustively  treated  by  Mr.  Wesley  C.  Mitchell  in  a 
recent  study.  Among  the  most  striking  of  these  influences  he 
mentions  the  following : 

First,  the  increase  in  the  amount  of  greenbacks  as,  for  ex- 
ample, reflected  in  the  rapid  rise  of  premium  after  July  n, 
1862,  the  date  of  the  second  legal-tender  act;  secondly,  the 
condition  of  the  treasury  as  disclosed  from  time  to  time  by  the 
secretary's  reports ;  thirdly,  the  credit  of  the  government  from 
week  to  week  as  shown  in  the  quotations  of  its  bonds  ;  fourthly, 
changes  in  the  personnel  of  the  government,  either  in  the 
treasury  department  or  in  Congress  through  political  elections  ; 
fifthly,  the  state  of  the  foreign  relations  of  the  country ;  sixthly, 
the  war  news  and  the  fluctuation  between  hope  and  discourage- 
ment consequent  upon  military  success  or  defeat.  At  the  time, 
however,  the  relation  between  these  several  factors  and  the 
premium  on  gold  was  not  clearly  apprehended  either  by  the 
treasury  department  or  by  Congress. 

Purely  speculative  influences  also  played  an  important  part 
in  the  variations  of  the  premium.  In  order  to  provide  a 
market  for  the  purchase  and  sale  of  gold,  an  exchange  was 
opened  in  New  York,  and  the  legitimate  dealings  executed 
there  were  quickly  supplemented  by  the  gambling  of  specula- 
tors, who  found  in  the  rapid  fluctuations  the  elements  of 
chance  which  always  claims  its  followers.  So  open  was  this 
trading,  virtually  in  the  public  credit,  that  it  constituted  in 
the  minds  of  many  a  public  scandal.  It  became  an  accepted 
belief  that  the  evil  of  fluctuation  was  due  to  the  "  unpatriotic 
criminal  efforts  of  speculators  and  probably  of  secret  enemies 
to  raise  the  price  of  gold  regardless  of  the  injury  inflicted 
upon  the  country."  "  Gold  gamblers  as  a  class,"  said  one 
senator,  "were  disloyal  men   in  sympathy  with  the  South." 


296  Civil  War;   Legal  Tenders.         [§  125 

It  was  indeed  charged  that  some  of  the  banks  had  assisted  in  this 
trading  by  making  loans  based  on  speculative  values  of  special 
deposits  of  gold.1 

Various  methods  were  consequently  enacted  to  check  and 
even  to  stop  this  form  of  trading.  For  example,  a  tax  was 
placed  (March  3,  1863)  upon  time-sales  of  gold;  and  loans 
upon  coin  for  security  for  more  than  its  par  value  were 
prohibited.  Chase  also  experimented  with  selling  exchange 
upon  London  at  a  rate  below  the  market,  but  this  proved 
inoperative.  Finally  June  17,  1864,  a  "gold  bill  "  to  prevent 
wagers  in  the  price  of  gold  was  enacted  with  the  approval  if 
not  at  the  prompting  of  Secretary  Chase.  This  act  declared 
unlawful  any  contract  to  purchase  or  sell  gold  to  be  delivered 
on  any  day  subsequent  to  the  making  of  the  contract ;  it  also 
forbade  the  purchase  or  the  sale  of  foreign  exchange  to  be 
delivered  at  any  time  beyond  ten  days  subsequent  to  the 
making  of  such  contract ;  or  the  making  of  any  contract  for 
the  sale  and  delivery  of  any  gold  coin  or  bullion  of  which  the 
person  making  such  contract  was  not  at  the  time  of  making 
it  in  actual  possession.  The  predicted  failure  of  such  drastic 
legislation  was  soon  realized.  The  fluctuations  in  the  premium 
on  gold  during  the  next  few  days  defied  all  calculations,  vary- 
ing as  follows  :  — 


June  18, 

95 

to 

95# 

"  20, 

98 

" 

98^ 

"  81, 

99K 

" 

108 

"   22,' 

105 

11 

i35 

"   23, 

105 

" 

125 

"   24, 

no 

(€ 

117 

"  25, 

112 

" 

120 

"   27, 

130 

M 

140 

"   28, 

130 

M 

140 

"   29, 

140 

(( 

x5° 

"   3°. 

140 

" 

iS' 

July  1, 

125 

u 

185 

"   2, 

130 

a 

150 

"   5, 

140 

« 

149 

1  Bolles,  vol.  iii,  p.  142. 


[§  125  Gold  Premium.  297 

The  situation  in  New  York  became  intolerable  ;  protests 
rushed  upon  Congress;  and  the  law  was  repealed  July  2, 
in  fifteen  days  after  its  passage.  From  this  time  on,  in  spite 
of  rapid  fluctuations,  the  range  of  depreciation  was  held  in 
check  ;  no  more  non-interest-bearing  legal  tenders  were  issued 
beyond  the  $450,000,000  authorized  under  the  three  laws 
referred  to  on  page  288,  and  the  military  successes  which 
occurred  during  the  summer  of  1864  presaged  the  speedy  end 
of  the  war. 


CHAPTER  XIII. 
LOANS,  TAXATION,  AND  BANKING  OF  THE  CIVIL  WAR. 

126.    References. 

Bibliographies  :  Bogart  and  Rawles,  47-49. 

Loans  :  Finance  Report,  1861,  pp.  7-10;  1862,  pp.  24-25  ;  1863,  pp.  13- 
18  ;  1864,  pp.  19-22  ;  Statutes,  XII,  259,  313,  345,  352,  709  ;  XIII,  13,  218, 
425,  468;  or  Dunbar,  160-198;  Bayley,  370-383,  446-462;  W.  F.  de 
Knight,  81-99;  ]■  Sherman,  Recollections,  I,  299-302;  J.  W.  Schuckers, 
Life  of  Chase,  338-355, 406-417  ;  H.  C.  Adams,  Finance,  537-542 ;  or  Public 
Debts,  126-133,  167;  D.  Kinley,  Independent  Treasury  System,  ioi-iii; 
A.  B.  Hart,  Chase,  236-245 ;  E.  A.  Ross,  Sinking  Funds,  in  Pub.  Amer. 
Econ.  Assn.,  VII,  389;  H.  Adams,  Historical  Essays,  288-300;  H.  Mc- 
Culloch,  Men  and  Measures,  184;  J.  J.  Knox,  United  States  Notes,  97 
(price  of  bonds). 

Taxation  :  Finance  Report,  1863,  pp.  3, 62-78  (internal  revenue) ;  1S64, 
p.  14;  1865,  pp.  27-31 ;  1883,  pp.  163-165  (direct  tax);  Statutes,  XII,  294; 
XIII,  223,  432,  469;  E.  Young,  Customs  Tariff  Legislation,  cxxi-cxlii ; 
Report  of  Revenue  Commission,  1S65-1866  (Well's  etc.),  pp.  13-16,  18-37, 
44-48,  161-167;  G.  S.  Boutwell,  Reminiscences,  I,  303-315;  J.  Sherman, 
Recollections,  302-309,  329-332;  J.  Sherman,  Speeches,  299-306,  317 
(income  tax);  J.  W.  Schuckers,  Life  of  Chase,  312-316,  332-337;  F.  C. 
Howe,  Taxation  under  Internal  Revenue  System,  50-190,  82-90  (direct 
tax);  J.  G.  Blaine,  Twenty  Years,  I,  429-434;  F.  W.  Taussig,  History 
of  the  Tariff,  160-170  ;  Bolles,  III,  63,  159-196,398-405  (internal  revenue) ; 
W.  M.  Daniels,  Public  Finance,  136-143  (tax  on  spirits);  C.  F.  Dunbar, 
The  Direct  Tax  in  1861,  in  Quar.  Jour.  Econ.,  Ill,  444-451  ;  J.  A.  Hill, 
The  Civil  War  Income  Tax,  in  Quar.  Jour.  Econ.,  VIII,  416,  491  ;  S.  W. 
McCall,  Stevens,  174-181 ;  Stanwood,    II,  109-138. 

National  Banking  System:  Finance  Report,  1 861,  pp.  18-20;  1862, 
pp.  17-21 ;  1863,  pp.  20-2I,  49-58;  1864,  pp.  46-55;  Statutes,  XII,  665; 
XIII,  99,  484;  or  Dunbar,  171;  J.  W.  Million,  Debate  on  National 
Ba?ik  Act  of  1863,  in  Jour.  Pol.  Econ.,  II  (1894),  251,  280  (references  to 
Congressional  Globe)  ;  E.  McPherson,  Political  History  of  the  Rebellion, 
356-573 ;  J.  Sherman,  Speeches,  32-79 ;  J.  Sherman,  Recollections,  I,  284- 
299;  J.  G.  Blaine,  Twenty  Years,  I,  470-487;  J.  J.  Knox,  History  of 
Banking,  96-ior,  220-269  (includes  summary  of  debate) ;  H.  McCulloch, 
Men  and  Measures,  165-170;  J.  W.  Schuckers,  Life  of  Chase,  282-31 1  ; 

298 


127] 


Taxation  in  1 861-1862. 


299 


Report  of  Monetary  Commission  (1898),  197-203,  505,  508,  51 1  (statutes); 
Bolles,  III,  197-226;  W.  G.  Sumner,  History  0/  Banking,  I,  457-464;  C 
F.  Dunbar,  History  and  Theory  of  Banking,  132-141  ;  C.  A.  Conant, 
History  of  Modern  Banking,  348-366;  H.  White,  406-414;  J.  K.  Upton, 
Money  and  Politics,  1 1 1-126 ;  W.  C.  Mitchell,  in  four.  Pol.  Econ.,  X  (1902), 
539-543  (State  bank-note  circulation) ;  A.  B.  Hart,  Chase,  274-284. 

Cost  of  the  War:  Bolles,  III,  241-248;  H.  C.  Adams,  Public 
Debts,  127-133. 

127.    Taxation  in  1861-1862. 

The  weakest  element  in  the  financiering  of  the  Civil  War  was 
the  delay  in  applying  effective  taxation.  During  the  four 
fiscal  years  1862-1865  the  net  receipts  from  taxes  and  loans 
(including  treasury  notes)  were  as  follows  :  — 


Customs 

Internal  revenue 
and  income  tax 

Total  taxes1 

Loans  including 
treasury  notes * 

1861-62 
1862-63 
1863-64 
1864-63 

Total 

$49,056,397 
69,059,642 

102,316,152 
84,928,260 

$37,640,787 
109,741,134 
209,464,215 

$50,851,729 
108,185,534 
212,532.936 
295.593,048 

$433,663,538 
596,203,071 
719,476,032 
872,574.145 

$305.36o.45i 

$356,846,136 

$667,163,247 

$2,621,916,786 

From  this  it  will  be  observed  that  during  1861-62  the  ratio 
of  loans  to  taxes  was  as  $8.52  to  $1  ;  in  1862-63,  as  $5.51  to 
$1  ;  in  1863-64,  as  $3.38  to  $1  ;  and  in  1864-65,  as  $2.95 
toll. 

It  is  easy  after  the  war  to  blame  the  government  for  its 
procrastination  and  lack  of  vigor  in  laying  taxes,  but  in  1861 
and  in  the  early  part  of  1862  the  way  did  not  appear 
clear.  The  blunder  of  delay  was  due  in  part  to  the  fact 
that  a  new  tariff  had  just  been  enacted ;  it  is  probable  if 
there  had  been  a  clear  realization  of  the  enormous  demands 

1  Including  $4,956,657  in  payments  on  a  direct  tax. 

2  Obtained  by  subtracting  "  expenditures  on  account  of  loans  "  from 
"  receipts  on  account  of  loans "  as  given  in  the  "  Finance  Reports," 
premiums  in  each  case  being  added  in.  The  results  differ  slightly  from 
those  obtained  by  taking  issues  and  redemptions  of  public  debt  as 
given  by  Bayley,  and  summarized  on  page  308. 


300  Loans,  Taxation,  Banking.         [§  127 

which  would  soon  threaten  the  treasury,  that  the  Morrill  tariff 
measure  would  have  been  thoroughly  recast  before  passage 
even  at  the  expense  of  protection  ;  there  was,  however,  no 
such  misgiving,  and  the  law  of  March  2,  1861,  was  enacted, 
as  framed  in  the  peaceful  days  of  the  spring  of  i860.  For 
similar  reasons  the  tariff  act  of  August  5,  1861,  touched  only 
a  small  part  of  the  schedules,  increasing  the  rates  on  sugar, 
tea,  coffee,  and  several  other  food  products,  not  native  to  the 
United  States ;  on  hemp,  hides,  rubber,  silk,  lead,  salt,  soda, 
brandy,  spices,  and  a  few  other  articles.  The  act  of  Decem- 
ber 24,  1 86 1,  was  limited  to  raising  the  duties  on  sugar,  tea, 
and  coffee.  This  tardiness  was  not  due  to  the  unwillingness 
of  the  people  to  be  taxed  ;  there  was  no  disposition  to  shirk 
the  burdens  of  increased  taxation  ;  on  the  contrary,  as  stated 
by  Senator  Fessenden,  the  country  was  impatient  to  con- 
tribute;  it  had  been  calling  for  a. tax  bill  that  should  raise 
revenue  equal  to  the  demands  of  the  time ;  and  so  Repre- 
sentative Morrill  referred,  as  early  as  January,  1862,  to  the 
necessity  of  assuring  the  country  that  whatever  the  army  was 
doing,  the  committee  on  ways  and  means  had  not  "  hutted  " 
nor  gone  into  winter  quarters.    • 

In  the  development  of  a  tax  system  appropriate  to  the 
events  and  conditions  of  the  war,  Chase  took  no  leadership. 
At  the  outset,  in  July,  1861,  he  laid  down  certain  propo- 
sitions as  to  what  constituted  adequate  revenue ;  but  he 
believed  that  the  war  demanded  no  extraordinary  taxation 
beyond  what  was  necessary  to  pay  the  interest  on  the  new 
loans  created,  and  to  extinguish  annually  a  small  amount  of 
the  new  debt.  In  December,  1861,  the  taxation  which  Chase 
recommended  was  not  intended  to  yield  more  than  a  frac- 
tional part  of  that  expected  from  the  loans,  and  he  even 
advised  against  any  radical  change  of  the  Morrill  tariff,  on  the 
ground  that  the  manufacturing  interests  ought  to  have  a 
further  trial  of  the  system ;  he  did  ask,  however,  for  internal 
revenue  duties. 

In  January,    1862,  Congress  adopted   a   more   determined 


§i27]  Taxation  in  1861-1862.  301 

policy  and  announced  its  purpose  to  enact  a  revenue  measure 
which  would  yield  $150,000,000  annually.  The  plans  in- 
cluded the  development  of  an  internal  revenue  system  and 
the  increase  of  customs  duties.  Of  excise  duties  the  country 
had  had  no  experience  for  more  than  a  generation,  and 
conditions  had  greatly  changed  since  18 15  :  the  country 
was  not  homogeneous;  over  its  broad  surface  were  scattered 
the  most  diverse  interests ;  population  in  some  portions  was 
dense,  in  others  very  sparse.  In  some  States  the  people 
were  without  exception  engaged  in  agriculture ;  in  others 
there  were  important  classes  occupied  in  manufactures  and 
commerce.  It  was  therefore  inevitable  that  an  excise  measure, 
when  applied  to  so  great  a  variety  of  subjects  as  it  was 
absolutely  necessary  to  include  in  order  to  yield  an  abundant 
revenue,  should  create  some  marked  inequalities. 

The  guiding  principle  of  the  internal  revenue  measure  of 
July  1,  1862,  was  the  imposition  of  moderate  duties  upon  a 
large  number  of  objects  rather  than  heavy  duties  upon  a  few. 
It  included  rates  upon  luxuries  represented  by  spirits,  ales, 
beer,  and  tobacco  ;  licenses  upon  occupations ;  duties  upon 
manufactures  or  products,  upon  auction  sales,  carriages,  yachts, 
billiard  tables,  and  plate ;  upon  slaughtered  cattle,  hogs,  and 
sheep ;  upon  railroads,  steamboats,  and  ferry  boats,  railroad 
bonds,  banking  institutions,  and  insurance  companies  ;  upon 
salaries  and  pay  of  officers  in  the  service  of  the  United  States ; 
upon  advertisements,  income,  and  legacies ;  and  an  extended 
list  of  stamp  duties.  The  universality  of  this  measure  has  been 
concisely  described  by  Wells  :  "  Wherever  you  find  an  article, 
a  product,  a  trade,  a  profession,  or  a  source  of  income,  tax  it." 

Coincident  with  the  enactment  of  this  measure  was  the 
passage  of  a  tariff  bill  (July  14,  1862)  ;  for  the  revision  of 
import  duties  was  absolutely  required  in  view  of  the  new 
duties  placed  by  the  internal  revenue  act  upon  domestic 
manufactures  and  industries.  It  was  necessary  "  to  make 
proper  reparation,  otherwise  we  shall  have  destroyed  the 
goose   that  lays  the   golden  egg."      The  protective   features 


302  Loans,  Taxation,  Banking.         [§  128 

then  added  were  simply  designed  to  compensate  temporarily 

for  the  internal  duties.     While  the  measure  afforded  in  some 

instances    more    protection    to    the    home    manufacturer,    it 

did  not  materially  modify  the  provisions  of  the  Morrill  tariff 

of  1861. 

128.    Increase  of  Taxes. 

In  the  secretary's  report  for  1862  there  is  no  discussion 
whatever  of  taxation,  although  an  internal  revenue  measure 
had  been  enacted  by  Congress  which  was  more  far-reaching 
than  anything  as  yet  suggested  by  Chase,  and  in  1863  the 
subject  was  dismissed  with  a  short  paragraph,  in  which  at- 
tention is  approvingly  called  to  the  recommendation  of  the 
commissioner  of  internal  revenue,  that  excise  receipts  be  in- 
creased to  $150,000,000.  The  returns  of  the  internal  revenue 
measure  of  1862  proved  most  disappointing:  instead  of  the 
estimated  $85,456,000  from  internal  revenue  duties  for  the 
fiscal  year  1862-1863,  the  returns  were  but  $37,640,000. 
While  this  was  a  serious  miscalculation,  it  was  largely  due  to 
the  unsettled  conditions  of  business  as  well  as  to  the  necessity 
of  establishing  at  short  notice  an  entirely  new  branch  of 
treasury  administration  for  the  collection  of  duties. 

Although  the  revenue  from  customs  duties  more  nearly  ap- 
proached the  estimates,  foreign  trade  was  seriously  affected  by 
the  energetic  movements  of  the  Confederate  navy,  and  the 
proceeds  of  the  new  schedules  were  inadequate  to  the  financial 
strain.  A  second  expansion  of  the  revenue  policy  was  made 
in  1864,  more  far-reaching  in  its  objects  than  that  undertaken 
in  1862  ;  but  it  was  from  the  internal  revenue  law  that  the 
chief  source  of  strength  was  derived.  These  duties  were  so 
increased  in  June,  1864,  that  their  yield  became  twice  as 
large  as  that  from  customs.  Industry  and  commerce  speedily 
adjusted  themselves  to  the  new  conditions  with  the  result  that 
the  taxes  afforded  a  revenue  of  $109,741,000  in  1863-1864, 
and  in  the  succeeding  year  of  $209,464,000.*     The  general 

1  Although  a  new  act  was  passed  in  1864,  the  revenue  of  1864-1S65 
was  largely  due  to  the  old  schedules  of  the  first  internal  revenue  act. 


§iz8]  Increase  of  Taxes.  303 

character  of  this  excise  act  has  been  well  summarized  by 
Howe  : 

"  In  general  the  bill  followed  the  lines  outlined  by  earlier 
legislation,  although  a  general  increase  in  rates  was  made. 
Thus  the  duty  upon  spirits  which  had  been  20  and  60  cents 
under  the  earlier  laws,  was  increased  to  $1.50  and  $2.00  per 
gallon  under  the  new;  upon  smoking  tobacco  the  tax  was 
more  than  doubled,  while  the  tax  upon  cigars  was  advanced 
from  a  maximum  rate  of  $3.50  per  thousand  to  a  maximum 
rate  of  $40.00  per  thousand.  In  a  like  manner,  although  not 
to  such  an  extravagant  extent,  license  taxes  were  increased, 
while  specific  duties  upon  many  manufactured  products  were 
doubled.  The  general  ad  valorem  rate  was  increased  from 
3  to  5  per  cent,  upon  most  articles  included  in  the  former 
schedule,  while  numerous  new  sources  of  revenue  were  ferreted 
out  and  taxed.  Nothing  was  omitted,  from  the  raw  product 
to  the  finished  commodity.  Often  an  article  received  a  half- 
dozen  additions  ere  it  reached  the  consumer.  And  not  only 
were  all  the  constituent  elements  which  entered  into  an  article 
taxed,  as  the  bolts,  rivets,  castings,  trimmings,  and  the  like,  of 
an  engine,  but  the  engine  when  completed  was  subject  to  an 
additional  ad  valorem  duty  upon  its  value ;  while  all  repairs 
which  increased  the  value  of  an  article  10  per  cent,  were 
rendered  dutiable  at  a  like  rate." 

The  tariff  act  of  June  30,  1864,  like  its  predecessor  of 
1862,  was  necessary  because  of  the  increased  excise  duties 
placed  upon  manufactures ;  but  it  went  further  in  the  direc- 
tion of  protection,  and  did  much  to  bring  the  customs  sched- 
ules up  to  that  level  to  which  the  country  has  since  been 
accustomed.  The  average  rate  on  dutiable  commodities  was 
increased  from  37.2  per  cent,  under  the  act  of  1862  to  47  per 
cent.  A  study  of  the  measure  does  not  yield  much  for  guid- 
ance in  finance.  It  was  pushed  through  Congress  with  little 
debate ;  revenue  was  imperative ;  the  industrial  conditions  of 
the  country  were  in  a  rapid  flux  due  to  the  abnormal  and 
violent  changes  in  price  caused  by  the  currency  expansion ; 


3°4 


Loans,  Taxation,  Banking.         [§  128 


and  there  was  little  opportunity  to  examine  and  no  adequate 
expert  opinion  available  to  criticise  details.  This  act  of  1864 
later  became  of  interest  because  until  1883  it  remained  the 
basis  and  controlling  principle  of  tariff  legislation. 

A  few  examples  illustrate  the  character  of  the  increases  be- 
tween 1 86 1  and  1864:  — 


Pig  iron 

Iron  rods  

Steel  in  ingots  valued  less  than 

7  cents  per  lb 

Salt 

Silks 

Wool,   valued    18  to   24  cents 

per  pound       

Wool,   valued  24   to  32   cents 

per  lb 

Woollen       manufactures      not 

otherwise  specified  .... 


Morrill  tariff, 
March,  1861 


$6  per  ton 

$20  per  ton 

1  \  cents  per  lb. 
4  cents  per  bush. 
30  per  cent. 

3  cents  per  lb. 

9  cents  per  lb. 

12  cents  per  lb. 
and  25  per  cent 


Tariff  of 
July  14,  1862 


$6  per  ton 

J25  per  ton 

1J  cents  per  lb. 
1  Scents  per  cwt. 
40  per  cent. 

3  cents  per  lb. 

9  cents  per  lb. 

18  cents  per  lb. 
and  30  percent. 


Tariff  of 
June  30,  i8( 


$9  per  ton 

1 J  cents  per  lb. 

2^  cents  per  lb. 
18  cents  per  cwt. 
50  per  cent. 

6  cents  per  lb. 

10  cents  per  lb. 
and  10  per  cent. 

24  cents  per  lb. 
and  40  per  cent. 


The  willingness  if  not  indeed  the  open  zeal  of  the  people 
for  taxation  continued  noteworthy.  A  foreign  minister  re- 
marked to  Seward  that  he  was  learning  something  new  about 
the  strength  of  popular  government.  "  I  was  not  surprised," 
he  said,  "  to  see  your  young  men  rushing  enthusiastically  to 
fight  for  their  flag.  I  have  seen  that  in  other  countries.  But 
I  have  never  before  seen  a  country  where  the  people  were 
clamorous  for  taxation."  David  A.  Wells,  a  careful  observer 
of  financial  and  industrial  affairs  during  the  war,  has  well  said 
that  such  was  the  fervor  of  patriotism  and  determination  to 
push  the  war  to  a  successful  issue  that  the  people  rejoiced  in 
taxation  :  "  The  country  was  rich,  and  its  accumulated  re- 
sources had  not  for  nearly  two  generations  been  in  any  degree 
drawn  upon  by  the  national  government  for  extraordinary 
taxation."  The  revenue  receipts  in  the  latter  months  of  the 
war  were  almost  beyond  belief.  In  the  fiscal  year  1 865-1 866 
the  tax  receipts  were  nearly  $500,000,000,  as  much  as  in 
the  eight  years  preceding  the  war  ;    nor  was  there  any  serious 


§"9] 


Income  Tax. 


3°5 


attempt  to  evade  taxation.  This  acquiescence  in  the  revenue 
policy  of  the  nation  was  partly  due  to  the  material  prosperity 
of  those  portions  of  the  country  which  escaped  the  immediate 
ravages  of  war.  Prices  were  rising  rapidly,  and  this  with  the 
enormous  demand  for  agricultural  and  manufactured  products 
for  the  army  gave  for  the  time  being  an  unexampled  stimulus 
to  the  farmer  and  manufacturer. 

129.    Income  Tax. 

A  convincing  illustration  of  the  willingness  of  the  people  to 
submit  to  revenue  exactions  was  seen  in  the  cordial  acceptance 
of  the  income  tax.  In  times  of  peace  this  duty,  novel  to  the 
federal  budget,  would  have  met  with  instant  condemnation ; 
but  under  the  circumstances  its  imposition  and  payment  was 
held  to  be  a  patriotic  duty.  The  first  tax  on  incomes  was 
authorized  August  5,  1861,  at  a  rate  of  3  per  cent,  on  the 
excess  of  all  incomes  above  $800  per  annum.  This  was  in- 
creased in  1862,  and  again  in  1865,  until  incomes  between 
$600  and  $5000  were  taxed  at  5  per  cent.,  and  above  $5000 
at  10  per  cent.  As  the  immediate  war  necessities  became 
less  pressing,  the  limit  of  exemption  was  advanced  to  $  1000, 
and  in  1867  to  $2000;  in  1872  the  tax  was  abolished. 
The  number  of  persons  assessed  with  the  total  amounts 
received  from  this  form  of  duty  throughout  the  period  of 
its  imposition  was  as  follows  :  — 


Number  of 

Amount 

persons 

collected 

1863 

$2,741,000 

1864 

20,294,000 

1865 

32,050,000 

1866 

460,170 

72,982,000 

1867 

266,135 

66,014,000 

1868 

254.6:7 

41,4551°°° 

1869 

272,843 

34,791,000 

1870 

276,661 

37.775.°°° 

1871 

74,775 

19,162,000 

1872 

72.949 

14,436,000 

1873 

5,062,000 

306  Loans,  Taxation,  Banking.         [§  130 

This  clearly  shows  that  the  tax  as  a  whole  was  very  pro- 
ductive, amounting  during  the  entire  period  to  $347,000,000. 
Owing  to  delays  in  establishing  the  system,  its  assistance  was 
not  so  powerfully  felt  during  the  years  of  actual  warfare ;  but 
in  the  subsequent  reorganization  of  the  finances  this  revenue 
was  of  great  help. 

130.    Loan  Act  of  February,  1862. 

As  has  been  indicated,  the  loan  operations  of  1861  were 
temporary,  with  the  exception  of  $50,000,000  in  twenty-year 
6  per  cent,  bonds;  but  in  February,  1862,  along  with  the 
legal-tender  notes,  provision  also  was  made  for  a  large  6  per 
cent,  loan,  popularly  known  as  the  five-twenty  bond  issue. 
From  this  time  on  loans  followed  each  other  with  great  rapid- 
ity, and  with  a  perplexing  variation  in  terms  and  conditions, 
which  embarrasses  an  orderly  presentation  of  the  government 
financiering.  And  when  to  loans  are  added  the  issue  of 
treasury  notes  and  certificates  of  deposit  the  disorder  becomes 
still  more  bewildering.  The  subject  is  rendered  clearer  by 
noting  that  the  various  forms  of  indebtedness  may  be  grouped 
under  four  general  classes  as  follows  :  — 


Rate  of  interest 

Length  of  loan 

A.     Long-term  bonds ". 

1.  Loansof  July  and  August,  1861 

2.  Five-twenties  of  1862      .     .     . 

4.  Ten-forties  of  1864     .... 

5.  Five-twenties  of  June,  1864  .  . 

6.  Navy  pension  fund     .... 

6 
6 
6 

5 

6 

3 

20  years 

5-20  years 

17  years 

10-40  years 

5-20  years 

Indefinite 

B.     Short-term  loans : 

7.  Treasury  notes  of  1861    .     .     . 

8.  Seven-thirties  of  1861      .     .     . 

9.  One-year  notes  of  1863    .     .    . 

10.  Two-year  notes  of  1863    .     .     . 

11.  Compound-interest  notes     .     . 

12.  Seven-thirties  of  1864  and  1S65 

6 

7A 

5 

6  compound 
7A 

( 60  days 

|    2  years 

3  years 

1  year 

2  years 

3  years 
3  years 

C.     Non-interest  notes : 

14.  Legal-tender  notes     .... 

15.  Fractional  currency    .... 

None 

Indefinite 
•t 

D.    Temporary  indebtedness: 
17.  Certificates  of  indebtedness 

4,  S.  6 
6 

« 

1  year 

§  130]      Loan  Act  of  February,  1862.  307 

Issues  and  redemptions  and  conversions  of  some  of  the 
short-term  forms  of  indebtedness  were  going  on  at  the  same 
time.  In  order  to  measure  the  growth  of  the  annual  indebt- 
edness the  redemptions  must  be  subtracted  from  the  issues 
for  each  year.  This  is  done  in  the  table  on  page  308, 
derived  from  data  published  in  "  Bayley's  Report." 

The  loan  act  of  February  25,  1862,  authorized  the  issue  of 
£500,000,000  of  bonds  redeemable  after  five  and  payable 
twenty  years  from  date,  bearing  6  per  cent,  interest.  The 
bonds  could  be  sold  "at  the  market  value  "  for  either  coin 
or  treasury  notes.  This  act  proved  to  be  of  little  immediate 
assistance,  for  previous  to  December,  1862,  only  $23,750,000 
of  the  issue  were  sold.  The  reasons  for  the  failure  are  not  far 
to  seek.  Chase  interpreted  market  value  as  at  least  equiva- 
lent to  par  value,  and  would  not  sell  bonds  below  par ;  ac- 
cording to  the  treasury  department  these  conditions  made  the 
negotiations  of  the  bonds  on  a  large  scale  practically  impos- 
sible, for  it  was  reasoned  that  no  one  would  buy  any  consider- 
able amount  except  with  the  idea  of  selling  again  at  a  profit ; 
and,  as  bonds  would  not  go  above  par  because  of  the  free 
convertibility  of  treasury  notes  into  these  securities  at  that  rate, 
there  was  practically  no  reason  for  speculative  purchases  on 
the  part  of  buyers.  Chase  was  sharply  criticised  for  his 
peculiar  construction  of  the  term  "  market  value,"  which  other 
financiers  consider  to  mean  not  par  value,  nor  value  at  a 
specified  time  or  place,  but  the  "  going  "  price.  The  criticism 
is  justified ;  the  market  value  was  the  price  the  securities 
would  bring  when  offered  in  the  market ;  and  the  treasury 
could  have  sold  a  large  amount  of  bonds  at  any  time  if  it 
had  placed  them  in  the  market,  and  sold  them  for  what  they 
would  bring.  Other  reasons  assigned  for  the  slow  sale  of 
the  bonds  were  the  lack  of  currency,  the  high  profits  of 
commercial  undertakings,  the  low  rate  of  interest,  and  the 
indefinite  time  of  payment,  the  bonds  being  neither  for  a 
long  nor  a  short  term.  Again,  the  earlier  issue  of  seven- 
thirty  notes  of  1 86 1  bore  a  more  favorable  rate  of  interest  to 


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Two-year    "      "  1863 
Compound-interest 

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Total      .... 

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Texan  indemnity    . 
Loan  of  July  and  Au 

gust,  1861  .     .     . 
Five-twenties  of  1862 
Loan  of  1863      .     . 
Ten-forties  of  1864 . 
Five-twenties  of  June 

I  Navy  pension  fund 

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0 

308 


§i3!]  Temporary  Indebtedness.  309 

investors,  and  so  long  as  this  was  on  the  market  it  handicapped 
the  new  6  per  cent.  loan. 

131.    Temporary  Indebtedness. 

The  fiscal  year  186 2- 1863  covers  the  darkest  period  of  finan- 
cial credit.  The  army  suffered  unexpected  reverses  during 
the  summer  of  1862  ;  the  proceeds  of  taxation  were  not 
large,  bonds  did  not  sell,  and  to  tide  over  difficulties  Chase 
had  recourse  to  more  novel  forms  of  indebtedness,  each  of 
which  constituted  a  slight  measure  of  relief.  Temporary  loans 
were  secured,  for  which  certificates  of  deposit  bearing  5  per 
cent,  interest  were  granted ;  and  the  offers  of  such  loans 
proved  so  large  that  the  first  limit  of  $25,000,000  imposed 
by  the  act  of  February  25,  1862,  was  on  March  17  extended 
to  $50,000,000,  on  July  11  to  $100,000,000,  and  finally, 
June  30,  1864,  to  $150,000,000.  These  certificates  were  in 
special  demand  by  banks,  being  used  in  settling  clearing-house 
balances;  $50,000,000  of  the  legal-tender  notes,  authorized 
July  11,  1862,  were  set  apart  as  a  reserve  for  the  reimburse- 
ment of  these  certificates. 

Another  measure  to  meet  temporary  needs  was  the  act  of 
March  1,  1862,  authorizing  the  issue  of  certificates  of  indebt- 
edness to  such  public  creditors  as  were  willing  to  receive  them 
in  exchange  for  audited  accounts.  These  certificates  were 
payable  in  one  year  (or  earlier  at  the  option  of  the  govern- 
ment), bore  interest  at  6  per  cent,  and  were  issued  in  sums 
not  less  than  $1000  in  amount ;  they  entered  into  the  currency 
until  enough  interest  accumulated  to  make  it  an  object  to 
capitalists  to  hold  them  as  an  investment. 

During  the  year  1862,  on  account  of  the  premium  on  the 
precious  metals,  silver  coins,  including  the  small  change,  went 
out  of  circulation,  greatly  to  the  embarrassment  of  retail  trade. 
Recourse  was  had  to  notes  and  tokens  of  municipal  corpora- 
tions and  mercantile  houses;  and  the  Congress,  July  17, 1862, 
authorized  the  use  of  postage  and  other  stamps.  This  incon- 
venient medium  was  in  turn  replaced,  March  3,  1863,  by  small 


310  Loans,  Taxation,  Banking.         [§132 

notes  known  as  fractional  currency,  in  denominations  running 
as  low  as  three  cents;  eventually  $50,000,000  of  this  non- 
interest  currency  was  authorized  :  at  the  time  of  issue  it  was 
an  effective  addition  to  the  resources  of  the  treasury. 


132.    Loan  Act  of  March  3,  1863. 

When  Congress  met  in  December,  1862,  it  was  confronted 
by  a  deficit  of  $276,900,000.  Especially  serious  were  the 
unpaid  requisitions  amounting  to  $46,400,000.  It  was  at  this 
hour  of  depression  that  Congress,  January  17,  1863,  ordered 
the  third  issue  of  United  States  notes;  this  was  followed 
by  invigorating  measures,  as  the  national  currency  act  of 
February  25  and  a  new  loan  act  of  March  3.  The  latter 
measure  gave  opportunity  for  a  great  variety  of  credit  opera- 
tions ;  it  provided  for  the  issue  of  one-year,  two-year,  and 
compound-interest  notes,  and  for  the  sale  of  6  per  cent, 
bonds  payable  in  not  less  than  ten  nor  more  than  forty  years. 
Although  $900,000,000  of  this  latter  issue  were  authorized  but 
$75,000,000  were  sold,  since  new  and  successful  efforts  were 
made  to  dispose  of  the  five-twenties  authorized  the  year 
previous.  Chase  attributed  the  successful  turn  in  bond-selling 
to  the  removal  of  the  restrictions  upon  the  negotiation  of 
bonds  prescribed  in  the  act  of  February  25,  1862.  The 
section  providing  for  sale  of  bonds  at  "  market  value,"  which 
Chase  interpreted  as  par  value,  was  repealed  ;  and,  as  has 
been  stated,  the  opportunity  to  convert  United  States  notes 
into  bonds  was  limited  to  July  1.  It  is  probable  that  the 
depreciation  of  the  convertible  greenback  had  much  to  do 
with  stimulating  bond  sales ;  for  when  gold  was  at  a  high  pre- 
mium the  true  interest  earned  by  a  gold-bearing  security 
doubled  and  sometimes  trebled  the  nominal  rate  written  in 
the  bond.  Chase,  indeed,  has  been  accused  of  endeavoring 
to  inflate  the  currency  in  order  to  hasten  conversion.  His 
own  words  on  a  later  occasion  were  :  "  The  bonds  do  not 
seem  to  be  readily  taken  as  yet  by  the  people.     It  required 


§132]       Loan  Act  of  March  3,  1863.         311 

the  printing  and  paying  out  of  $400,000,000  of  greenbacks  be- 
fore the  five-twenty  6  per  cent,  bonds  could  be  floated  easily  at 
par,  and  it  will  probably  require  the  circulating  paper  issues  of 
the  government,  now  amounting  to  about  $625,000,000,  to  be 
increased  to  $650,000,000  or  $700,000,000  before  the  people 
will  be  induced  to  take  5  per  cent,  bonds  in  order  to  get  rid 
of  the  surplus  circulation  that  may  accumulate  in  their  hands, 
that  cannot  be  more  profitably  invested  in  other  modes."  The 
real  reasons  for  success  in  selling  bonds  at  this  crisis  was  the 
passage  of  the  national  banking  act  in  February,  1863,  the 
adoption  of  a  different  method  of  selling  bonds  direct  to 
the  people,  and  the  increasing  confidence  in  victory  by  the 
army. 

In  selling  these  bonds  the  systematic  attempt  of  agents  to 
make  a  wide  distribution  gave  gratifying  evidence  of  the 
feasibility  of  a  popular  loan.  An  experienced  banker,  Jay 
Cooke,  was  employed  as  general  agent,  receiving  a  com- 
mission of  three-eighths  of  one  per  cent,  on  all  sales  (one-half 
of  one  per  cent,  on  the  first  $10,000,000).  He  in  turn  en- 
gaged twenty-five  hundred  sub-agents  in  a  large  number  of 
towns  and  cities,  and  made  every  effort  to  present  the  attrac- 
tions of  bond  investment.  A  pamphlet  was  published  by  this 
active  broker,  who  styled  himself  "  General  Subscription  Agent 
of  the  Government  Loan,"  in  which  a  national  debt  is  por- 
trayed as  a  national  blessing :  the  country  was  told  that  the 
generation  fighting  the  war  should  not  be  called  upon  to 
pay  for  it,  but  should  rely  upon  borrowing.  The  popular 
interest  thus  excited  operated  very  powerfully  in  enlarging  the 
subscriptions  and  as  a  result  of  this  energetic  campaign  Chase 
was  able  to  report,  in  December,  1863,  the  sale  of  nearly 
$400,000,000  of  five-twenty  bonds.  This  plan  of  selling 
bonds  through  a  system  of  agencies  outside  of  the  immediate 
control  of  the  government  met  with  bitter  criticism  on  the 
ground  that  it  afforded  opportunities  to  speculators  and  syn- 
dicates, and  was  abandoned  by  Chase  in  the  negotiation  of 
the  next  loan. 


312  Loans,  Taxation,  Banking.         [§  134 

133.    Short-Time  Notes. 

The  loan  act  of  March,  1863,  also  provided  for  the  issue  of 
short-time  notes  bearing  5  per  cent,  interest ;  they  were 
legal  tender  for  face  value  and  convertible,  principal  and  in- 
terest, into  United  States  notes ;  it  was  not,  however,  intended 
that  they  should  circulate  as  currency,  but  be  held  by  investors. 
In  the  fiscal  year  1 863-1 864,  one-year  notes  of  this  character 
were  sold  through  the  associated  banks  of  New  York,  Phila- 
delphia, and  Boston,  aggregating  $44,520,000  ;  and  two-year 
notes  to  the  amount  of  $166,480,000.  Experience  soon 
proved  that  these  notes  had  undesirable  qualities.  At  the 
request  of  the  banks,  coupons  were  attached  to  the  notes, 
with  the  troublesome  limitation  that  they  should  not  be  cut 
off  except  by  an  officer  of  the  government.  This  condition 
naturally  made  the  notes  unsuitable  for  popular  investment, 
but  they  were  largely  taken  by  banks  for  reserve  purposes ; 
these  in  turn  set  free  their  own  paper  currency,  and  in  pro- 
portion increased  the  evils  of  an  inflated  monetary  medium. 
When  the  interest  became  due  the  coupons  were  cut  and  the 
banks  sent  the  notes  once  more  into  circulation.  "  It  was 
evident,"  says  Mr.  Chase,  "  that  the  periodical  payments 
of  interest  would  periodically  make  the  notes  simple  legal 
tender,  and  so  increase  from  time  to  time  the  volume  of 
currency  and  expose  the  government  and  the  business  com- 
munity to  the  evil  of  recurring  inflation  and  contraction." 
Consequently,  when  a  temporary  loan  had  to  be  negotiated 
in  the  succeeding  year,  preference  was  given  to  the  com- 
pound-interest treasury  notes  at  a  higher  rate  of  interest. 

134.    Financial  Situation  in  1864. 

When  Chase  made  his  third  annual  report  to  Congress  in 
December,  1863,  the  finances  were  in  a  more  favorable  con- 
dition :  the  national  banking  act  had  been  passed ;  taxation 
began  to  be  productive  ;  the  successes  of  the  Union  armies  at 
Gettysburg  and  Vicksburg  in  July,  1 863,  increased  confidence  ; 


§  134]        Financial  Situation  in  1864.  313 

the  premium  on  gold  went  down  to  23^ ;  and  there  was  a 
rapid  subscription  for  the  five- twenty  bonds.  The  receipts, 
as  stated  in  the  report,  during  the  fiscal  year  1862-1863, 
were  $124,443,000  from  ordinary  sources,  and  the  enormous 
sum  of  $590,266,000  from  loans;  and  the  expenditures  were 
$714,709,000.  The  debt,  July  1,  1863,  was  $1,098,793,000, 
of  which  more  than  one-half  had  accumulated  in  the  year 
then  ending.  Although  the  customs  produced  all  that  had 
been  hoped  for,  $69,000,000,  the  internal  revenue  taxes  (as 
already  stated)  proved  a  disappointment.  Little  change,  how- 
ever, was  proposed  in  the  sources  of  revenue ;  to  meet  the 
estimate  of  $755,000,000  for  total  expenditures  in  1863- 
1864,  Chase  relied  on  ordinary  receipts  of  $161,500,000,  and 
further  loans  of  $594,000,000  ;  some  additional  increase  of 
internal  revenue  duties  was  recommended,  so  that  the  yield 
from  this  source  might  be  at  least  $150,000,000. 

In  compliance  with  a  request  of  the  secretary  that  he  be 
given  still  greater  freedom  in  negotiating  loans,  Congress,  by  a 
new  loan  act  of  March  3,  1864,  provided  for  an  issue  of 
$200,000,000  of  bonds  bearing  interest  at  not  over  6  per 
cent,  and  redeemable  at  a  period  between  five  and  forty 
years  at  the  pleasure  of  the  government.  The  government 
placed  the  minimum  period  of  redemption  at  ten  years, 
thus  giving  to  the  loan  the  popular  name  of  ten-forties. 
For  reasons  not  clearly  apparent,  Chase  determined  to  lower 
the  rate  of  interest  on  this  loan  from  6  to  5  per  cent. 
The  result  was  disastrous,  for  the  market  quotations  of 
government  bonds  at  the  time  were  not  so  high  as  to  jus- 
tify expectation  that  the  public  would  absorb  a  large  amount 
at  a  lower  rate  of  interest.  Bond-buying  nearly  ceased. 
The  total  amount  sold  under  the  act  of  March  3,  1864, 
up  to  the  end  of  the  fiscal  year,  June  30,  1864,  was  only 
$73,337,000;  and  at  the  same  time  the  expense  of  the  war 
was  increasing. 

The  treasury  was  once  more  forced  to  fall  back  upon  short 
loans    including   one-year   and    two-year    notes,    compound- 


314  Loans,  Taxation,  Banking.         [§  135 

interest  notes,  and  certificates  of  indebtedness.  The  inge- 
nuity of  Secretary  Chase  in  devising  short-term  loans,  under 
the  discretionary  powers  of  the  acts  of  1863  and  1864,  is  well 
illustrated  in  the  three-year  compound-interest  notes,  with  a 
minimum  denomination  of  #10,  which  were  legal  tender  for 
their  face  value;  at  maturity  each  $100  note  was  worth 
$119.40.  As  the  rate  of  interest  was  high,  —  6  per  cent, 
compound,  —  and  as  like  other  treasury  notes  they  were 
exempt  from  taxation,  they  were  sought  by  investors.  At  first 
the  right  to  issue  compound-interest  notes  was  but  sparingly 
exercised  ;  and  it  has  been  asserted  that  the  treasury  erred 
in  not  putting  out  a  much  larger  volume  of  this  currency  in 
small  denominations,  as  low  even  as  $10.  The  critic  however 
must  recognize  that  the  small  denominations  would  have  gone 
into  general  circulation  to  reinforce  the  greenback  circulation, 
which  was  especially  responsible  for  the  premium  on  gold. 
On  the  other  hand  the  notes  of  denominations  of  §50  and 
upwards  were  absorbed  by  banks  for  reserve,  where  they 
displaced  and  drove  into  circulation  greenbacks  bearing  no 
interest,  thus  increasing  the  currency  inflation. 

135.    Administration  of   Secretary  Fessenden. 

On  June  29,  1864,  Chase  resigned  his  secretaryship.  He 
had  been  irritated  over  appointments  to  important  positions  in 
the  treasury ;  he  was  also  influenced  in  some  degree  by  the  dis- 
couraging aspect  of  the  finances  caused  by  the  decline  in  bond 
sales ;  he  was  possibly  embarrassed  by  the  unexpected  conse- 
quences of  the  passage  of  the  Gold  Bill  of  June  17,  which  has 
been  previously  described ;  and  probably  he  expected  to  be 
recalled.  Much  against  his  will,  Senator  Fessenden  of  Maine 
was  appointed  successor  to  Mr.  Chase.  As  chairman  of  the 
finance  committee  of  the  Senate  he  had  taken  a  leading  part 
in  framing  measures  relating  to  revenue  and  appropriations. 
An  Eastern  lawyer,  he  did  not  carry  into  office  a  hostile  sus- 
picion of  the  banking  interest ;  and,  although  he  had  been 
originally  an  opponent  of  the  legal-tender  bill,  he  afterwards 


§i35]  Secretary  Fessenden.  315 

admitted  that  there  was  under  the  circumstances  no  other 
resource  than  government  paper. 

The  financial  situation  confronting  Fessenden  was  one  of 
embarrassment,  particularly  to  a  conservative  financier.  The 
cash  balance  in  the  treasury  on  July  1,  1864,  was  only 
$18,842,000;  the  customs  duties  for  1864-1865,  estimated  at 
$70,271,000,  would  not  long  pay  the  interest  on  the  public 
debt,  then  estimated  at  $91,800,000;  $161,796,000  of  cer- 
tificates of  indebtedness  were  outstanding,  for  the  payment 
of  which  there  was  a  continuous  pressure  ;  a  considerable  por- 
tion, $110,000,000,  of  the  seven-thirties  of  1861  fell  due  in 
August  and  October ;  there  were  unpaid  requisitions  amount- 
ing to  $71,814,000  ;  pay  to  the  soldiers  was  in  arrears;  and 
an  immediate  increase  in  the  army  had  been  ordered,  which 
would  further  increase  the  daily  expenses  of  the  war  from 
$2,250,000  to  $3,000,000. 

Fessenden  continued  in  office  only  until  March  3,  1865; 
but  during  this  brief  period  he  displayed  courage  and  vigor. 
Although  opposed  to  further  short  loans  or  note  issues  which 
tended  to  swell  the  paper  currency,  he  found  that  the  banks 
were  not  willing  to  take  long  loans  on  terms  acceptable  to 
the  treasury.  He  consequently  issued  proposals  for  a  great 
national  loan  under  the  act  of  June  30,  1864,  authorizing 
$200,000,000  in  the  form  of  notes  payable  in  three  years 
with  interest  at  7.3  per  cent.,  and  for  this  purpose  he 
employed  once  more  the  services  of  Jay  Cooke  and  his  sub- 
agencies.  In  the  latter  half  of  1864  $110,800,000  of  the 
seven-thirties  were  sold,  and  in  1865  $718,000,000,  —  the 
amount  originally  authorized  being  increased  $600,000,000 
by  the  act  of  March  3,  1865.  Of  the  very  first  issue 
$20,000,000  went  to  the  "  gallant  soldiers,  who  not  only  re- 
ceived them  with  alacrity  but  expressed  their  satisfaction  at 
being  able  to  aid  their  country  by  loaning  money  to  the  gov- 
ernment." These  temporary  loans  not  only  bore  an  excep- 
tional rate  of  interest,  but  carried  the  valuable  privilege  of 
conversion  into  five-twenty  6  per  cent,  bonds.     As  for  long- 


3  1 6  Loans,  Taxation,  Banking.         [§  136 

term  loans,  Fessenden  took  no  chances  ;  in  place  of  the  5 
per  cents,  which  Chase  attempted  to  market  he  returned  to  the 
6  per  cent,  five-twenty  and  ten-forty  bonds. 

Fessenden  undertook  the  retirement  of  the  5  per  cent, 
coupon  treasury  notes  which  had  proved  so  troublesome  be- 
cause alternately  withdrawn  and  rushed  into  circulation,  and  he 
substituted  6  per  cent,  compound-interest  notes,  the  popu- 
larity of  which  had  been  tested  by  Chase,  and  which  were 
absorbed  in  large  amounts.  By  these  issues  and  conversions, 
as  well  as  by  the  more  determined  military  policy  of  1864,  the 
confidence  of  investors  was  strengthened. 

136.     Summary  of  Loans. 

The  loans  of  the  Civil  War  period  were  summarized  on 
page  306  under  four  general  headings :  long-term  loans, 
interest-bearing  notes,  non-interest-bearing  notes,  and  tem- 
porary loans.  The  use  made  of  these  several  varieties 
during  the  successive  years  of  the  war  is  compared  in  the 
following  table,  which  gives  the  net  annual  increase  and 
decrease  for  each  group  in  millions  of  dollars  :  — 


Kind  of  loan 

1861-1862 

1862-1863 

1 863- 1864 

1864-1865 

1861-1865 

A.  Long-term  loans      .     .     . 

B.  Interest-bearing  notes 

C.  Non-interest-bearing  notes 

D.  Temporary  loans      .     .     . 

64.8 
106.4 
158.6 
107.8 

172.4 

15.1 

2532 

154.8 

466.6 
209.8 
43-6 
24.0 ' 

340.8 
559.0 
2.7 
3°-9  * 

1044.6 
890.3 
458.1 
207.7 

Total 

437° 

595-5 

696.0 

871.6 

2600.7 

1  Decrease. 


At  first  reliance  was  placed  on  the  short-term  loan,  a  policy 
which  introduced  a  distinct  element  of  weakness.  The  pro- 
portions of  long-term  and  short-term  indebtedness  by  years 
were  as  follows  :  — 


§*37] 


Loan  Policy  of  Chase. 


3J7 


Long  term 

Short  terra 

1861-1862 
1862-1863 
1863-1864 
1864-1865 

15  per  cent 
29    "     " 
67    ««     " 
39    "      " 

85  per  cent. 
ji    "     " 
33    "     " 
61    "      " 

1862-1865 

40    "      " 

60    "     " 

Instead  of  incurring  liabilities  which  would*run  for  ten,  twenty, 
thirty,  or  even  forty  years'  time,  the  country  was  flooded, 
especially  in  the  earlier  years  of  the  war,  with  short-time 
paper,  which  served  in  many  instances  the  purposes  of  cur- 
rency, expanded  prices,  and  increased  the  speculation  and 
extravagance  always  incident  to  war.  Temporary  obligations 
falling  due  in  the  midst  of  civil  conflict  were  a  source 
of  double  vexation  to  the  treasury  department,  which  was 
obliged  to  conduct  a  series  of  refunding  operations,  and  at 
the  same  time  to  go  into  the  money  market  to  borrow  ever- 
increasing  sums  for  a  war  which  apparently  would  never  end. 


137.    Loan  Policy  of  Chase. 

In  his  policy  for  the  negotiation  of  loans,  Chase  kept  four 
objects  steadily  in  view:  (1)  moderate  interest;  (2)  general 
distribution;  (3)  future  controllability ;  (4)  incidental  utility. 
Each  may  conveniently  be  discussed  in  turn. 

(1)  Moderate  interest.  Chase  felt  much  satisfaction  in 
the  continuous  decrease  in  the  rate  of  interest.  The  first 
loans  were  negotiated  at  7.30  per  cent. ;  the  next  at  7 ;  then 
at  6 ;  and  finally  5  per  cent,  was  offered ;  while  the  in- 
debtedness represented  by  United  States  notes  and  fractional 
currency  bore  no  interest.  To  carry  out  the  policy  of 
low  interest,  and  to  stand  by  an  unwillingness  to  sell  bonds 
below  par,  Chase  refused  to  borrow  except  on  his  own  arbi- 
trary terms.  While  unable,  or  perhaps  unwilling,  to  establish 
a  productive  tax  system  at  short  notice,  the  treasury  placed 


3 1 8  Loans,  Taxation,  Banking.         [§  137 

bars  across  its  own  path,  and  left  to  itself  no  other  recourse 
than  the  issue  of  treasury  notes  and  short-term  loans.  The 
prejudice  against  the  sale  of  bonds  by  the  government  on 
terms  fixed  by  the  commercial  conditions  of  the  money  market 
early  manifested  itself  in  the  financial  history  of  the  United 
States  and  has  been  referred  to  in  a  previous  chapter.  It  rests 
on  the  same  basis  as  the  persistent  political  agitation  against 
banks  from  the  beginning  of  our  government,  and  the  deep- 
seated  belief  that  there  can  be  no  harmony  of  interests 
between  the  public  and  the  money  lenders  and  brokers. 
Congressional  debates  during  the  Civil  War  furnish  plenty  of 
illustrations  of  this  antagonism  ;  banks  were  "  sharps  "  and 
"harpies";  "out  of  the  blood  of  their  sinking  country" 
banks  are  enabled  to  coin  the  gains  of  their  infamy ;  brokers 
and  jobbers  and  money  changers  are  pitted  over  against  the 
people  of  the  United  States.  How  far  responsibility  for  insist- 
ence on  a  low  rate  of  interest  is  to  be  distributed  between 
Secretary  Chase  and  other  party  leaders  it  is  difficult  to  deter- 
mine. Chase,  however,  did  not  hesitate  to  take  great  credit 
for  this  element  of  war  financiering. 

A  signal  blunder  was  made  in  substituting  a  5  per  cent. 
for  a  6  per  cent.  bond.  The  actual  results  on  the  national 
credit  were  not  anticipated ;  so  long  as  the  legal-tender  notes 
were  convertible  into  6  per  cent,  bonds,  in  spite  of  military 
reverses  and  national  discouragement,  the  premium  on  gold 
was  kept  within  comparatively  narrow  limits.  With  the  issue 
of  the  new  bonds  at  a  low  rate  of  interest  the  subscriptions 
fell  off  by  one-half;  but  more  than  that,  as  pointed  out  by 
Amasa  Walker,  "  by  issuing  the  new  bonds  at  5  per  cent, 
instead  of  6  the  secretary  virtually  depreciated  his  own  cur- 
rency by  the  difference,  because  it  required  $1.20  in  green- 
backs to  purchase  an  equal  income  or  interest  on  5  per  cent, 
which  $1.00  would  purchase  on  bonds  bearing  interest  at  6. 
Consequently  the  price  of  gold  was  raised  20  per  cent.,  and  of 
course  the  prices  of  all  the  government  must  purchase  to  carry 
on  the  war."     It  was  this  error  which  gave  new  encouragement 


§  137]  Loan  Policy  of  Chase.  319 

to  the  secretary  to  issue  more  short-time  notes,  legal  tender 
for  their  face  value,  in  order  to  induce  purchase  of  5  per 
cent,  bonds,  and  this  in  turn  of  course  occasioned  a  further  rise 
in  the  premium  on  gold. 

(2)  General  distribution.  A  second  object  of  Chase  was 
the  "general  distribution"  of  the  bonds:  he  wished  the  obli- 
gations of  the  government  to  be  held  far  and  wide,  and 
pointed  with  satisfaction  to  the  results  of  the  popular  subscrip- 
tions for  bonds  through  the  agency  established  by  Jay  Cooke 
in  1863-1864;  in  a  single  district  in  Ohio  there  were  six 
thousand  bondholders.  Although  he  abandoned  this  method  in 
the  sale  of  the  ten- forties  because  of  the  calumnies  to  which 
he  was  subjected,  he  "  had  determined  to  return  to  it  and  dis- 
regard slander  and  slanderers."  When  Fessenden  undertook 
his  great  loaning  operation  he  re-engaged  Cooke  and  his 
agents,  as  he  believed  with  great  advantage.  The  method  of 
appeal  to  the  public  for  subscriptions  instead  of  bargaining 
with  the  banks  met  on  the  whole  with  popular  approval,  and 
was  again  in  accord  with  the  underlying  hostility  to  the  large 
moneyed  interests  of  the  great  cities. 

(3)  Future  controllability.  Chase  was  strongly  opposed 
to  long  loans ;  it  was  his  leading  purpose,  he  says,  to  intro- 
duce into  the  financial  methods  of  the  treasury  the  principle  of 
controllability.  "  He  could  never  consent  that  the  people 
should  be  subjected  to  the  money-lenders,  but  insisted  that  the 
money-lenders  should  rather  be  subjected  to  the  people."  ' 
It  was  with  reluctance  that  at  the  outbreak  of  the  war  he 
acquiesced  in  the  apparent  necessity  of  negotiating  twenty- 
year  bonds ;  and  in  the  issue  of  five-twenties  and  ten-forties, 
and  the  development  of  a  system  of  temporary  loans  as 
the  one-year  and  two-year  treasury  notes,  certificates  of 
indebtedness  payable  in  one  year,  and  certificates  of  deposit, 
he  soon  developed  a  policy  more  in  harmony  with  his 
own  convictions.  In  this  way  Chase  was  convinced  that 
when  peace  was  established  the  government  would  be  able  to 

1  Schucker's  Life  of  Chase,  p.  408. 


320  Loans,  Taxation,  Banking.         [§  138 

fund  the  debt  at  a  moderate  rate  of  interest  and  to  provide  for 
payment  at  such  periods  as  then  seemed  most  advantageous. 
Within  limits  this  policy  has  merit,  but  a  reservation  to  the 
government  of  the  right  to  extinguish  bonds  after  five  years 
must  be  paid  for  by  the  sale  of  bonds  to  investors  at  a  lower 
price.  This  sort  of  time  limitation  also  gave  the  impression 
to  foreigners  who  were  unacquainted  with  novel  restrictions 
of  this  kind  that  "  the  funded  debt  was  of  a  vague  and 
dubious  character." 

It  has  been  suggested  that  the  short-term  notes  were  in 
reality  exchequer  notes,  and  that  in  their  issue  the  treasury 
department  followed  respectable  precedents,  as  for  example 
that  of  the  British  government.  Our  policy  differed  from  that 
of  Great  Britain,  however,  in  two  respects  :  no  earnest  and 
persistent  effort  was  made  to  limit  the  floating  indebtedness 
by  attracting  its  conversion  into  long-term  bonds ;  and  a  large 
part  of  the  treasury  notes  were  made  a  legal  tender. 

(4)  Incidental  utility.  In  order  to  secure  indirect  advan- 
tages to  business,  Chase  advocated  the  receipt  of  temporary 
loans  in  the  form  of  deposits,  reimbursable  by  the  treasurer 
after  a  few  days'  notice,  so  that  any  stringency  of  the  market 
might  be  alleviated.  The  advantage  of  this  was  seen  in  1864, 
when  during  a  pressure  for  current  funds  the  treasury  depart- 
ment quickly  paid  out  over  $50,000,000  of  these  deposits. 
Chase  found  advantage  also  in  the  wide  diffusion  of  the  debt, 
by  which  national  unity  and  strength  were  secured  ;  and  finally 
he  discovered  "  national  good  growing  from  the  bitterness  of 
debt "  in  the  new  basis  of  a  national  banking  currency. 

138.    Arguments  in  Favor  of  a  National  Banking  System. 

Chase's  first  recommendation  of  a  national  banking  system 
in  1 86 1  has  been  noted;  though  not  then  acted  upon  the 
idea  was  not  allowed  to  disappear.  Chase  had  long  been  con- 
vinced of  the  evils  of  paper  currency  issued  by  local  institu- 
tions; in  his  inaugural  address  as  governor  of  Ohio  in  1856 
he  not  only  announced  that  it  was  constitutional  for  Congress 


§  138]  National  Banking  System.  321 

to  prohibit  local  bank  circulation,  but  he  spoke  favorably  of 
free  issues  based  upon  ample  securities.  In  1862  when  Chase 
again  brought  forward  the  plan,  and  made  a  more  detailed 
study  of  the  factors  involved,  the  project  met  with  greater  public 
favor.  The  charter  of  banks  resting  upon  national  authority, 
and  not  upon  a  State,  appealed  to  the  growing  feeling  of 
nationalism  in  all  departments  of  political  action ;  it  appealed 
also  to  those  who  were  jealous  of  the  power  of  private  cor- 
porations ;  it  appealed  to  those  who  wished  to  relieve  the 
government  from  distressing  bargains,  and  who  hoped  the 
government  would  thus  gain  the  ascendancy  in  the  control 
of  capital ;  and  finally  it  appealed  to  those  who  feared  that 
further  issues  of  United  States  notes  would  ultimately  ruin  both 
the  government  and  private  credit.  Indeed,  the  national 
banking  plan  now  found  favor  with  many  State  banks  and 
private  bankers  who  had  previously  denounced  any  such 
scheme. 

From  the  beginning  of  the  public  discussion  to  the  thorough- 
going Bank  Act  of  1864  the  arguments  for  the  substitution  of 
a  national  banking  currency  in  place  of  notes  issued  by  the 
State  banks  cover  a  wide  range  and  furnish  a  useful  picture 
of  State  banking  in  its  later  development.  First  there  was 
the  argument  that  a  national  system  would  furnish  an  uniform 
circulation.  On  January  1,  1862,  there  were  in  the  United 
States  1496  banks  that  issued  circulating  notes,  possessing  an 
aggregate  capital  of  $420,000,000  and  carrying  a  circulation 
of  $184,000,000.  "They  were  established  under  the  laws  of 
twenty-nine  different  States ;  they  were  granted  different 
privileges,  subjected  to  different  restrictions,  and  their  circula- 
tion was  based  on  a  great  variety  of  securities,  of  different 
qualities  and  quantities.  In  some  States  the  bill-holder  was 
secured  by  the  daily  redemption  of  notes  in  the  principal  city  ; 
in  others  by  the  pledge  of  State  stocks;  and  in  others  by 
coin  reserves.  There  were  State  banks  with  branches,  inde- 
pendent banks,  free  banks,  banks  organized  under  a  general 
law,  and   banks  with   special  charters."     In  New  York  there 

21 


322  Loans,  Taxation,  Banking.         [§138 

were  banks  incorporated  by  special  act,  individual  banks,  and 
banks  organized  under  the  free  banking  law;  in  Louisiana 
there  were  chartered  banks  and  free  banks;  in  Ohio,  inde- 
pendent banks,  free  banks,  and  a  State  bank  with  numerous 
branches ;  in  Indiana  a  State  bank  with  branches,  and  free 
banks ;  in  Massachusetts,  banks  under  special  charters,  and 
banks  organized  under  a  general  law.  In  some  States  there 
were  boards  of  bank  commissioners  who  made  frequent  and 
thorough  examinations,  while  in  others  no  such  boards  existed 
or  existed  only  in  name  ;  in  a  few  States  the  public  was  in- 
formed as  to  the  condition  of  the  banks  by  the  publication  of 
periodical  statements,  but  as  a  rule  publicity  was  not  insisted 
upon. 

In  November,  1862,  the  circulation  in  the  loyal  States  was 
$167,000,000.  In  only  nine  of  the  States  did  the  law  require 
the  circulation  to  be  secured  by  State  bonds,  and  the  State 
securities  pledged  for  the  notes  were  only  $40,000,000,  leaving 
over  $120,000,000  provided  for  by  other  assets,  sometimes  by 
none.  All  told,  about  7000  different  kinds  of  notes  circulated, 
to  say  nothing  of  successful  counterfeits.  Over  3000  varieties 
of  altered  notes  were  afloat,  1 700  varieties  of  spurious  notes, 
and  over  800  varieties  of  imitations,  making  more  than 
5500  varieties  of  fraudulent  notes;  and  "the  dead  weight 
of  all  the  losses  occasioned  by  them  fell  at  last  upon  the 
people  who  were  not  expert  in  such  matters."  In  1862 
only  253  banks  issued  notes  which  had  not  been  altered  or 
imitated. 

The  desire  for  a  national  currency  to  put  an  end  to  these 
irregularities  was  probably  stronger  than  any  other  considera- 
tion for  arousing  the  popular  interest  in  the  establishment  of 
a  national  banking  system.  It  was  this  feeling  which  led  to  a 
reluctant  acquiescence  in  the  exemption  of  the  capital,  circu- 
lation, and  deposits  of  national  banks  from  taxation.  It  was 
the  day  of  sacrifices ;  public  good  demanded  the  giving  up  of 
State  banks  as  agents  of  currency  and  as  a  source  of  local 
taxation ;  it  was  held  right  that  the  national  currency  should 


§  i38]  National  Banking  System.  323 

be  accorded  privileges  equal  to  those  of  the  national  bonded 
securities.  On  the  other  hand  the  danger  of  monopoly  was 
recognized,  and  many  wished  to  reserve  the  right  of  taxation 
to  States  and  towns,  so  that  the  system  might  be  destroyed, 
if  necessary,  after  the  crisis  was  over.  If  the  country  had 
been  at  peace  it  is  doubtful  indeed  if  the  measure  could 
have  been  passed. 

A  second  argument  against  the  State  banks  was  found  in  the 
redundancy  of  the  circulation,  particularly  after  the  issue  of 
United  States  notes  in  1862  ;  and  the  blame  for  the  general 
disorder  of  the  currency  was  laid  by  many  upon  the  bank-note 
circulation  rather  than  upon  the  government  notes.  It  was  on 
this  ground  that  Secretary  Chase  made  a  special  arraignment 
of  the  banks  in  his  report  of  December,  1862.  While  not 
believing  that  the  volume  of  currency  of  the  country  was 
greatly  in  excess  of  legitimate  demands,  he  admitted  some 
redundancy  and  consequent  depreciation,  and  attributed  it  to 
the  banks.  The  increase  in  the  circulation  of  State  bank-notes 
in  the  Union  States,  in  one  year,  1862,  from  $130,000,000 
to  $167,000,000  was  in  his  opinion  due  to  no  public  neces- 
sity; and  he  held  that  the  banks  ought  not  to  have  been 
allowed  to  expand  their  issues  during  the  suspension  of  specie 
payments.  Bankers,  he  complained,  did  not  even  suggest 
a  practical  limit  to  the  increase  of  circulation,  and  in  this 
respect  they  showed  a  marked  difference  in  policy  from  the 
government,  which  restricted  the  issue  of  treasury  notes, 
made  its  bills  convertible  into  United  States  bonds,  and  re- 
quired that  the  interest  on  the  bonds  should  be  payable  in 
coin. 

This  criticism  made  by  Chase  was  admitted  by  many  ex- 
perts. In  October,  1862,  the  Bankers'  Magazine  expressed 
a  fear  that  the  banking  movement  of  that  year  had  been 
unwise.  There  had  been  an  "  unfortunate  rush  for  profit 
through  the  enlarged  volume  of  circulation  and  loans,  an  in- 
flation more  rapid  than  ever  occurred  before  in  this  country." 
Circulation  had  increased  in  New  Hampshire  27  per  cent.;  in 


324  Loans,  Taxation,  Banking.         [§  138 

Philadelphia  138  per  cent. ;  in  Providence  86  per  cent. ;  in  six 
months  the  bank  circulation  of  New  York  City  had  increased 
69  per  cent. ;  in  Massachusetts  20  per  cent. ;  in  Baltimore  32 
per  cent. ;  in  Newark,  N.  J.,  42  per  cent. ;  and  in  the  interior 
of  New  York  nearly  1 1  per  cent.  By  others  the  banks  were 
accused  of  absorbing  the  government  notes  as  fast  as  they 
were  issued  and  of  putting  out  their  own  notes  in  substitution, 
and  then  at  their  convenience  converting  the  notes  into  bonds 
on  which  they  enjoyed  interest.  "  It  is  a  struggle  on  the  part 
of  the  banking  institutions  of  the  country  to  bleed  the  gov- 
ernment of  the  United  States  to  the  tune  of  6  per  cent,  on 
ever)'  dollar  which  it  is  necessary  for  the  government  to 
use  in  carrying  on  this  struggle  for  our  independence  and 
our  life." 

A  third  defect  in  the  State  banks  was  found  in  their  unequal 
distribution.  At  that  time  the  relation  of  credit  institutions  to 
accumulated  capital  and  volume  of  enterprise  was  but  vaguely 
apprehended,  if  indeed  it  was  recognized  at  all.  In  New 
England  the  circulation  of  the  banks  was  about  $50,000,000, 
while  in  Ohio,  with  three-quarters  as  large  a  population,  it  was 
but  $9,000,000.  Such  sectional  inequality  was  held  by  many 
to  be  dangerous  and  undemocratic. 

State  bank  issues  had  also  been  characterized  by  violent 
contractions  and  expansions  of  the  currency  ;  this  has  already 
been  referred  to  in  previous  chapters,  but  its  renewed  impor- 
tance at  this  time  justifies  a  brief  review  in  illustration  :  in 
three  years  ending  with  181 8  the  currency  had  been  re- 
duced from  $110,000,000  to  $45,000,000;  in  1834  there  was 
$95,000,000  in  circulation;  in  1837  the  volume  had  risen 
to  $149,000,000,  and  before  the  end  of  the  year  it  fell  to 
$116,000,000.  In  1841  there  was  $107,000,000;  at  the 
end  of  1842,  only  $59,000,000.  In  1857  it  had  reached 
$215,000,000,  its  highest  point  of  inflation  before  the  war; 
and  on  the  first  of  January,  1858,  it  had  sunk  to  $155,000,000. 
This  periodic  inflation  and  withdrawal  of  currency  was  gen- 
erally regarded  as  an  evil ;  there  was  little  appreciation  of  the 


§138]  National  Banking  System.  325 

excellent  commercial  functions  of  elastic  bank-note  issues  for 
satisfying  the  needs  of  exchange  as  they  fluctuate  from  day 
to  day. 

Again,  the  issue  of  notes  by  local  banks  was  regarded  as 
incompatible  with  the  advantages  to  be  derived  by  the  gov- 
ernment from  the  issue  of  treasury  notes.  At  the  outset  the 
State  banks  had  attempted  to  discredit  the  demand  notes ; 
and  after  the  suspension  of  specie  payments  they  used  the 
legal-tender  notes  to  redeem  their  own  circulation,  selling  at 
a  premium  the  gold  which  they  otherwise  would  have  been 
obliged  to  hold  for  this  purpose.  This  gave  the  banks  a 
freer  opportunity  to  expand  their  own  currency,  and  indirectly 
served  to  diminish  the  demand  for  the  treasury  notes  of  the 
government.  Of  less  importance  was  the  conviction  not  yet 
extinct  that  State  banks  could  not  constitutionally  issue  paper 
money ;  if  objection  was  made  that  banks  chartered  by  federal 
authority  would  have  no  more  constitutional  basis,  an  in- 
genious reply  was  made  that  national  banks  do  not  "  issue  " 
notes,  but  only  use  such  as  are  furnished  them  in  such 
quantities  and  under  such  restrictions  as  are  prescribed  by 
Congress. 

In  addition  to  these  evils  of  the  currency  a  potent  reason  for 
the  establishment  of  the  national  banking  system  was  the 
support  to  be  afforded  to  public  credit  and  national  union. 
Chase  thought  that  at  least  $250,000,000  of  bonds  would  be 
required  for  deposit  as  security  for  circulation,  —  a  constant 
demand  which  would  secure  steadiness  in  the  price  of  the 
bonds.  National  institutions  would  also  be  convenient  for  the 
deposit  of  public  moneys,  since  the  government  would  possess 
an  ultimate  control  over  these  funds,  which  was  not  possible 
in  State  institutions ;  and  particularly  would  this  be  the  case  in 
the  deposit  of  receipts  accruing  under  the  internal  revenue  act. 
In  referring  to  the  law  which  permitted  the  payment  of  in- 
ternal revenue  duties  in  legal-tender  paper  of  the  government, 
Blaine  writes  that  no  provision  "could  have  operated  so 
powerfully  for  a  system  of  national  banks.     The  people  were 


326  Loans,  Taxation,  Banking.         [§  139 

subjected  to  annoyance  and  often  to  expense  in  exchanging 
the  notes  of  their  local  banks  for  the  government  medium. 
The  tax  collectors  could  not  intrust  the  funds  in  their  hands 
to  State  banks  except  at  their  own  risk.  The  fact  that  the 
bills  of  State  banks  were  not  receivable  for  taxes  tended 
constantly  to  bring  them  into  disrepute.  The  system  of 
internal  taxes  now  reached  the  interior  and  the  people  were 
made  daily  witnesses  to  the  fact  that  the  government  would 
not  trust  a  dollar  of  its  money  in  the  vaults  of  a  State 
bank."  J 

Of  importance  in  the  development  of  public  conviction  in 
favor  of  a  national  system  was  the  plea  that  the  commercial 
interests  of  existing  institutions  might  be  reconciled  with  those 
of  the  whole  people ;  that  a  national  system  was  "  recom- 
mended by  the  firm  anchorage  it  will  supply  to  the  union  of 
the  States."  Indeed  a  few  advocates  extravagantly  declared 
that  if  the  system  had  existed  in  i860  secession  would  have 
been  impossible. 

139.    National  Banking  Act  of  1863. 

The  act  to  provide  a  national  currency  secured  by  a  pledge 
of  United  States  stocks  and  to  provide  for  the  circulation  and 
redemption  thereof  was  approved  February  25,  1863.  The 
system  provided  that  a  banking  association  upon  depositing 
bonds  with  the  treasurer  of  the  United  States  could  receive 
circulating  notes  to  the  amount  of  90  per  cent,  of  the  current 
market  value  of  the  bonds  deposited  (not  exceeding,  however, 
90  per  cent,  of  the  par  value).  The  amount  of  notes  to  be 
issued  was  originally  limited  to  $300,000,000,  to  be  apportioned 
to  banks  in  the  different  States  according  to  population  and 
existing  banking  conditions  and  necessities.  The  notes  were 
receivable  for  all  government  dues  except  duties  on  imports, 
and  were  payable  by  the  government  except  for  its  indebtedness 
and  for  interest  on  its  bonds ;  otherwise  the  notes  were  legal 

1  Blaine,  Tivetity  Years,  i,  473. 


§  139]     National  Banking  Act  of  1863.        327 

tender  only  between  the  national  banks.  Each  bank  was 
required  to  redeem  its  circulation  at  its  own  counter.  The 
system  was  to  be  supervised  by  a  bureau  of  currency  in  the 
treasury  department. 

After  the  passage  of  the  first  act  (1863)  the  system  de- 
veloped but  slowly.  The  banks  organized  were  for  the  most 
part  in  the  Western  States  of  Ohio,  Indiana,  and  Illinois,  due 
to  the  greater  need  of  circulation  in  that  section.  On  Octo- 
ber 1,  1863,  66  banks  had  deposited  less  than  $4,000,000 
of  United  States  bonds;  a  year  later  there  were  584  with  a 
circulation  of  $65,000,000.  As  the  original  banking  act  was 
defective  in  many  particulars  it  was  largely  recast  by  the  law 
of  June  3,  1864.  Provision  was  then  made  for  redemption  of 
circulation  of  all  banks  at  agencies  in  certain  principal  cities ; 
the  amount  of  capital  necessary  for  establishing  a  bank  was  in- 
creased, together  with  stricter  provisions  in  regard  to  the  pay- 
ing in  of  capital ;  more  convenient  provision  was  made  for  the 
conversion  of  the  State  banks  into  national  associations ;  and 
the  banking  business  was  given  a  status  somewhat  more  inde- 
pendent of  the  treasury  department  than  at  first  designed ;  of 
special  importance  was  the  modification  of  the  independent 
treasury  act  in  giving  the  secretary  of  the  treasury  power  to 
select  banks  to  be  depositories  of  public  money,  except  re- 
ceipts from  customs,  on  deposit  of  United  States  bonds  as 
security.  Provision  was  also  made  for  taxing  the  national 
banks  by  the  federal  government,  for  in  the  few  months 
which  had  already  elapsed  since  the  introduction  of  the  sys- 
tem there  had  risen  a  clamor  that  the  banks  were  evading 
taxation  altogether,  inasmuch  as  there  was  some  question 
whether  States  under  the  decision  of  Maryland  v.  McCulloch 
(181 9)  would  have  the  right  to  tax.  Consequently  in  the  act 
of  1864  Congress  placed  federal  taxes  upon  the  capital,  de- 
posits, and  circulation  of  banks,  and  gave  authority  to  States  to 
tax  the  shares  of  banks. 

The  advantage  of  a  currency  uniform  throughout  the  country 
speedily  converted  many  who  at  first  disapproved  of  the  na- 


328  Loans,  Taxation,  Banking.         [§  139 

tional  banking  system.  Among  these  was  Fessenden,  who 
frankly  acknowledged  his  change  of  mind  and  declared  that 
the  plan  was  based  upon  sound  principles,  and  that  its  full 
benefit  could  not  be  realized  "  as  long  as  any  system  at  war 
with  the  great  objects  sought  to  be  attained  continued  to  exist 
unchecked  and  uncontrolled  "  ;  he  consequently  recommended 
in  December,  1864,  that  discriminating  legislation  be  enacted 
at  the  earliest  possible  moment  to  induce  the  withdrawal 
of  all  local  circulation.  Congress  agreed,  and  in  the  act  of 
March  3,  1865,  ordered  the  taxation  of  State  bank  issues 
10  per  cent,  annually,  beginning  with  July  1,  1866.  This 
forced  local  notes  into  retirement. 

The  founding  a  banking  currency  upon  national  government 
securities  had  many  advantages ;  first  of  all,  it  not  only  cre- 
ated a  special  demand  for  bonds,  but  enlisted  a  strong  and 
active  financial  interest  in  the  general  welfare  of  the  govern- 
ment's credit.  In  the  second  place,  by  driving  State  bank 
issues  out  of  existence  through  heavy  taxation,  it  tended  to 
create  a  demand  for  United  States  legal  tenders  and  other 
treasury  issues  for  meeting  the  ordinary  operations  of  trade 
and  exchange.  Lastly,  the  assistance  of  the  national  banks 
in  floating  the  loans  of  the  government  was  of  the  greatest 
importance.  A  more  remote  effect  of  this  legislation  was  its 
influence  in  shaping  both  popular  discussions  and  congres- 
sional action  upon  government  paper  currency  as  a  rival 
system  to  bank  paper.  The  full  measure  of  these  results, 
however,  was  not  felt  while  the  war  was  actually  in  progress. 
The  banks  which  were  chartered  during  this  period  had  already, 
as  State  institutions,  invested  their  funds  largely  in  government 
bonds,  being  attracted  by  the  high  rate  of  interest  as  meas- 
ured in  paper  money ;  and  too  much  weight  must  not  be  given 
to  the  new  banking  system  as  an  instrument  of  war  finance. 
It  was  not  until  the  war  was  over,  when  the  State  bank  issues 
felt  the  heavy  hand  of  taxation,  that  the  national  system  took 
complete  possession  of  the  field. 


§  i4°]         Receipts  and  Expenditures.  329 

140.    Receipts  and  Expenditures,  1861-1865. 

The  ordinary  receipts  of  the  treasury  from  taxation  during 
the  period  of  the  Civil  War  have  already  been  presented  in 
a  table  on  page  299.  The  proceeds  from  sales  of  public 
lands  dwindle  to  insignificance,  but  under  "Miscellaneous," 
as  indicated  in  the  table  on  page  330,  there  was  an  important 
increase  in  1864  due  to  the  sale  of  captured  property  and 
prizes,  premium  on  sales  of  gold  coin,  and  commutation 
money.     Expenditures,   1862-1865,  were  as  follows:  — 


War 

Navy 

Miscella- 
neous1 

Interest 
on  debt 

Total 

1862 
1863 

1864 
1865 

$389.  '73,ooo 
603,314,000 
690,391,000 

1,030,690,000 

$42,640,000 
63,261,000 
85,705,000 

122,617,000 

$24,564,000 
27,428,000 
35,186,000 
64,395,000 

$13,190,000 
24,729,000 
53,685,000 
77»395,o°° 

$469,569,000 
718,733,000 
864,968,000 

1,*95,099.«» 

1  Including  Indians  and  Pensions. 


An  examination  of  these  figures  gives  an  approximate  esti- 
mate of  the  cost  of  the  war.  In  four  years  the  expenditures 
for  "war"  amounted  to  $2,713,568,000  compared  with 
$88,306,000  in  the  preceding  four  years  (1 858-1 861)  ;  and 
for  the  "navy"  to  $314,223,000  compared  with  $52,644,000 
in  the  previous  term.  To  these  totals  must  be  added  the 
interest  charges  on  the  debt  created  during  the  period.  The 
expenditures  during  the  four  years  of  conflict,  however,  are 
but  a  portion  of  the  account ;  several  years  elapsed  before 
the  expenditures  for  war  and  navy  were  brought  down  to 
a  normal  basis,  and  in  the  last  year  of  the  war,  pensions  began 
to  swell  the  yearly  cost  of  the  government.  In  1879  an 
estimate  was  made  of  the  expenditures  growing  out  of  the  war 
down  to  that  date,  showing  the  enormous  sum  of  $6, 1 90,000,000. 
A  complete  estimate  would  include  a  large  amount  of  State 


33° 


Loans,  Taxation,  Banking.         [§  140 


expenditure  which  finds  no  record  in  the  books  of  the  national 
treasury. 

A  comparison  of  receipts  and  expenditures  is  shown  in  the 
following  table  in  millions  of  dollars  :  — 


Receipts 

Year 

Expendi- 
tures 

Deficit 

Taxes 

Miscella- 
neous l 

Total 

1862 

$5°-8 

$1.1 

$51-9 

$469.6 

$417-7 

1863 

108. 1 

3-9 

112.0 

718.7 

606.7 

1864 

212.5 

30.  S 

343-3 

865.0 

621.7 

1865 

295.6 

26.4 

322.0 

1295.1 

973-« 

t 

Including  sr 

les  of  public 

and. 

CHAPTER  XIV. 
FUNDING  OF  THE  INDEBTEDNESS. 

141.    References. 

Contraction  of  the  Currency:  Finance  Report,  1865,  pp.  11-14; 
1866,  pp.  8-10;  1867,  pp.  v-xiv;  1868,  pp.  iii-vii;  1869,  pp.  xiii-xiv; 
Statutes,  XIV,  31  ;  XV,  34 ;  or  Dunbar,  199-201 ;  J.  Sherman,  Speeches, 
88-96;  J.  Sherman,  Recollections,  I,  373-388,  433-435;  W.  D.  Kelley, 
Speeches,  210-238  (Jan.  18,  1868);  J.  A.  Garfield,  Works,  I,  183-201 
(March  16,  1866),  284-312  (May  15, 1868) ;  H.  McCulloch,  Addresses  and 
Speeches,  48-53  (Oct.  II,  1865);  H.  McCulloch,  Men  and  Measures, 
210-213;  J.  G.  Blaine,  Twenty  Years,  II,  317-330;  Bankers'  Magazine, 
XXI,  674-688  (G.  Walker),  859-862;  XXII,  5-8  (McCulloch),  161-170 
(A.  Walker),  351-356;  XXIII,  698-713  (speeches  of  Senators  Morton  and 
Sherman)  ;  Bolles,  III,  263-281 ;  A.  D.  Noyes,  Thirty  Years  of  American 
Finance,  9-17  ;  Report  of  Monetary  Commission  (1898),  416-423;  W.  G. 
Sumner,  History  of  American  Currency,  211-214;  J.  K.  Upton,  Money 
and  Politics,  127-145. 

Funding  of  the  Debt:  Finance  Report,  1865,  pp.  21-26;  1868,  pp. 
xxxix-xliii ;  1869,  pp.  xvi-xviii;  1870,  p.  vi ;  1871,  pp.  xvii,  255-259 ; 
Statutes,  XVI,  272  (funding,  July  14,  1870);  or  Dunbar,  205;  J.  Sher- 
man, Speeches,  97-120  (May  22,  1866),  156-178  (Feb.  27,  1868),  239-283 
(Feb.  28,  1870);  G.  S.  Boutwell,  Reminiscences,  II,  141-145,  183-202; 
J.  Sherman,  Recollections,  I,  435-440,  451-458  ;  H.  McCulloch,  Men  and 
Measures,  243-257;  E.  McPherson,  History  of  Reconstruction,  597-604 
(funding  act  of  1870) ;  Bayley,  387-390,  464 ;  W.  F.  de  Knight,  103- 
108;  J.  G.  Blaine,  Twenty  Years,  II,  556-559;  Bolles,  III,  305-336; 
H.  C.  Adams,  Public  Debts,  226,  231-236;  J.  S.  Gibbons,  Public  Debt  of 
the  U.  S.,  1-38. 

Taxation  of  Bonds:  Finance  Report,  1865,  p.  26;  1867,  p.  xxx  ; 
J.  A.  Garfield,  Works,  I,  327-355  (July  15,  1868),  356-363  (July  23, 
1868)  ;  J.  Sherman,  Speeches,  150-152;  J.  B.  Thayer,  Cases  on  Constitu- 
tional Law,  II,  1357-1363  ;  Bolles,  III,  323-326;  J.  N.  Pomeroy,  Consti- 
tutional Law,  249-253  (ed.  1886);  J.  I.  C.  Hare,  American  Constitutional 
Law  (1889),  I,  258. 

Payment  of  Debt  in  Specie:  Finance  Report,  1867,  pp.  xxii-xxviii ; 
Statutes,  XV,  1 ;  J.  A.  Garfield,  Works,  I,  439~442  (March  3,  1869);  J. 
Sherman,  Speeches,  142-150  (Dec.  17,  1867),  159-17°  (Feb-  27>  1868), 
203-206  (Feb.  27,  1869)  ;  J.  Sherman,  Recollections,  I,  440;  Bolles,  III, 
315-320;  E.  L.  Pierce,  Memoir  of  Charles  Sumner,  IV,  353-355. 

331 


332         Funding  of  the  Indebtedness.       [§  142 

Sinking  Fund  :  Finance  Report,  1869,  xiii ;  1875,  *x  >  x876,  ix  ;  1884, 
xx ;  Bolles,  III,  314;  E.  A.  Ross,  Sinking  Funds,  in  Pub.  Amer.  Econ. 
Assn.,  VII,  289-392. 


142.    Character  of  the  Public  Debt  in  1865. 

The  return  of  peace  brought  with  it  the  necessity  for  a  radi- 
cal reorganization  of  the  finances.  "  In  the  midst  of  the  war, 
when  the  blood  of  the  nation  was  up,"  as  Garfield  eloquently 
remarked;  "when  patriotism  was  aroused;  when  the  last  man 
and  the  last  dollar  were  offered  a  willing  sacrifice,  —  it  was 
comparatively  easy  to  pass  financial  bills  and  raise  millions  of 
money.  But  now  when  we  gather  up  all  of  our  pledges  and 
promises  of  four  terrible  years,  and  redeem  them  out  of  the 
solid  resources  of  the  people  in  time  of  peace,  the  problem  is 
far  more  difficult."  The  immediate  tasks  before  the  govern- 
ment were  three  :  funding  the  debt  into  a  more  convenient 
form ;  revision  of  the  tax  system  to  accord  with  the  debt 
policy ;  and  the  restoration  of  the  standard  of  value  by  the 
resumption  of  specie  payments.  A  fourth  and  embarrassing 
question  was  the  order  in  which  these  problems  should  be 
settled. 

The  public  debt  reached  its  highest  point  September  1, 
1865,  when  it  stood  at  $2,846,000,000,  less  $88,000,000  in 
the  treasury,  leaving  a  net  debt  of  $2,758,000,000.  Of  this 
vast  indebtedness  less  than  one-half  was  funded;  $433,160,- 
000  was  in  United  States  legal-tender  notes,  $26,344,000  in 
fractional  currency,  and  the  remainder  consisted  of  various 
forms  of  short  time  paper  or  temporary  securities,  a  large  part 
of  which  was  due  before  1868,  and  a  considerable  amount  was 
maturing  daily.  For  example  a  temporary  loan  of  $107,000,- 
000  was  payable  at  ten  days'  notice  on  the  part  of  the  holder  ; 
there  were  $830,000,000  seven-thirty  notes ;  compound-in- 
terest notes  amounted  to  $217,700,000;  and  certificates  of 
indebtedness  to  $85,000,000.  On  June  30,  1866,  the  inter- 
est-bearing debt  consisted  of  loans  bearing  five  different  rates 
of  interest  and  maturing  at  nineteen  different  periods  of  time. 


§  H3]  Funding  or  Contraction.  333 

On  a  part  of  the  loans  the  interest  was  payable  in  coin,  and 
on  part  in  currency.  Of  the  6  per  cent,  bonds  and  notes 
there  were  twelve  different  kinds;  of  the  5  per  cent,  loans 
five  different  issues ;  and  of  the  seven-thirty  notes  at  least  five, 
some  convertible  at  the  option  of  the  government  and  some 
at  the  option  of  the  holder.  Bonds  of  some  issues  were 
exchangeable  for  others.  A  large  portion  of  the  five-twenty 
bonds  caused  uneasiness  to  investors,  because  of  a  contin- 
gency clause  by  which  the  government  might  redeem  them 
within  five  years  of  date  of  issue,  that  is,  in  1867.  Of  the 
total  debt  only  one-ninth  ran  in  any  contingency  longer  than 
two  years.  "  Eight-ninths  of  it  consisted  of  transient  forms 
issued  under  laws  made  up  to  a  great  extent  of  incomprehensi- 
ble verbiage  giving  unlimited  direction  over  the  mass  to  one 
man  and  expressing  in  the  aggregate  nearly  one  hundred 
contingencies  of  duration,  option,  conversion,  extension,  re- 
newal, etc."  It  was  indeed  difficult,  as  Senator  Sherman 
remarked,  for  the  people  of  the  United  States  to  understand 
any  save  two  or  three  of  the  loans,  and  none  but  a  successful 
investor  engaged  in  the  sale  and  purchase  of  stock  could  tell 
the  various  differences  in  value  of  the  several  securities,  and 
the  reasons  therefor. 

143.    Funding  or  Contraction. 

The  political  conditions  at  this  critical  period  were  not 
favorable  to  the  settlement  of  any  great  public  question,  owing 
to  the  bitter  estrangement  of  President  Johnson  from  the  party 
leaders  in  Congress.  Fortunately,  however,  this  dissension 
did  not  mar  the  administration  of  the  treasury,  for  Johnson 
paid  little  attention  to  financial  questions.  Hugh  McCulloch, 
who  succeeded  Fessenden  as  secretary  of  the  treasury  in 
March,  1865,  was  trained  for  the  position;  he  had  been  a 
successful  banker  in  Indiana,  and  as  comptroller  of  the  cur- 
rency had  increased  his  reputation  by  the  good  judgment 
shown  in  establishing  the  national  banking  system.  He  possi- 
bly regarded  fiscal  subjects  too  partially  from  the  standpoint 


334         Funding  of  the  Indebtedness.       [§  143 

of  a  conservative  banker ;  on  the  other  hand  his  western 
associations  stood  him  in  good  stead.  The  financial  com- 
mittees of  Congress  were  also  under  the  leadership  of  strong 
men ;  Fessenden  had  returned  to  the  Senate  and  was  once 
more  chairman  of  the  committee  on  finance ;  in  the  House, 
Justin  S.  Morrill  was  chairman  of  the  committee  on  ways  and 
means. 

Although,  in  the  opinion  of  many  experts,  funding  of  the 
floating  debt,  and  particularly  the  certificates  of  indebted- 
ness, was  the  first  if  not  the  only  immediate  duty  of  the 
government,  McCulloch  placed  emphasis  upon  the  necessity 
of  a  speedy  resumption  of  specie  payments,  and  declared  that 
this  could  be  effected  only  by  a  reduction  of  the  volume  of 
currency  ;  he  consequently  asked  for  wide  discretionary  powers 
to  sell  bonds  for  the  purpose  of  retiring  the  notes. 

In  a  thorough  review  of  the  finances  in  December,  1865, 
McCulloch  declared  that  the  legal-tender  acts  were  to  be 
regarded  as  war  measures ;  that  the  statute  making  the 
notes  a  legal  tender  for  all  debts,  public  and  private,  was 
under  ordinary  circumstances  not  within  the  scope  of  the 
duties  or  of  the  powers  of  Congress  ;  and  that  while  he  did 
not  recommend  the  repeal  of  their  legal-tender  provisions,  he 
was  convinced  they  ought  not  to  remain  in  force  one  day 
longer  than  would  be  necessary  to  enable  the  people  to  return 
to  the  use  of  constitutional  currency.  The  issue  of  green- 
backs as  lawful  money  was  a  measure,  expedient,  doubtless, 
and  necessary  in  a  great  emergency,  but,  as  the  emergency 
no  longer  existed,  the  notes  should  be  speedily  retired. 
McCulloch  therefore  asked  that  the  compound-interest  notes 
which  were  legal  tender  for  their  face  value,  should  cease  to 
be  legal  tender  from  the  date  of  their  maturity ;  and  that 
authority  be  given  not  only  to  fund  the  temporary  loan  and 
the  certificates  of  indebtedness,  but  also  to  sell  bonds  for  the 
retirement  of  the  compound-interest  notes  and  the  United 
States  notes. 

At  first  it  appeared  that  this  view  would  meet  with  gen- 


§  144]  Theories  of  Resumption.  335 

eral  approval.  The  House  of  Representatives,  December  18, 
1865,  passed  a  resolution,  with  only  six  dissenting  votes, 
expressing  its  cordial  concurrence  as  to  the  necessity  of  a 
contraction  of  the  currency  with  a  view  to  as  early  a  resump- 
tion of  specie  payments  as  the  various  interests  of  this  country 
would  permit,  "  and  we  hereby  pledge  co-operative  action  to 
this  end  as  speedily  as  possible."  The  resolution  soon  proved 
not  to  reflect  the  real  sentiment  of  the  people ;  for  before 
many  months  a  determined  effort  was  making  to  revolutionize 
the  traditional  monetary  sytem  of  the  country.  Without  dis- 
cussing all  the  propositions  brought  forward  in  this  long  con- 
troversy over  resumption  during  the  decade  following  the  war, 
the  narrative  may  be  rendered  clearer  by  a  brief  statement  of 
the  various  theories  of  credit  money  set  forth  in  the  debates 
of  the  time. 

144.    Theories  of  Resumption. 

The  first  group  of  writers  and  speakers  insisted  upon  an 
immediate  or  at  least  a  speedy  return  to  specie  payments, 
without  waiting  for  contraction  of  the  notes,  or  indeed  for  any 
legislative  action.  In  this  class,  for  example,  were  Ex-Secretary 
Chase  and  the  New  York  Tribune,  which  during  months 
together  heralded  the  cry,  "The  way  to  resume  is  to  resume." 
Senator  Sumner  in  1868  looked  forward  to  resumption  in  eight 
months ;  he  argued  less  from  economic  laws  than  from  moral 
force,  confidence,  and  the  announced  fixed  purpose  of  the 
government  to  consummate  the  work. 

A  second  class,  in  which  were  found  many  eastern  bankers, 
advised  the  speedy  accumulation  of  a  gold  reserve  in  order 
to  raise  the  value  of  greenbacks  to  a  gold  standard.  The 
weakness  of  this  plan  was  the  difficulty  of  getting  the  gold. 
The  trade  balance  was  against  the  United  States,  and  any 
effort  to  purchase  the  required  amount  of  gold  from  abroad 
through  the  sale  of  bonds  would,  it  was  reasoned,  derange 
commerce.  The  plan  was  also  declared  to  be  uneconomical, 
since  it  locked  up  in  an  idle  hoard  a  mass  of  specie  which 


336         Funding  of  the  Indebtedness.      [§  144 

served  no  purpose  other  than  to  protect  the  treasury  certifi- 
cates circulating  in  their  place.  If  either  were  to  be  con- 
demned to  idleness,  why  not  retire  the  paper  money  altogether, 
and  leave  the  gold  free  to  do  the  ordinary  work  of  exchange  ? 
The  advocates  of  establishing  a  gold  reserve,  however,  grad- 
ually gained  ground  and  finally  won  in  the  next  decade,  largely 
because  this  plan  did  not  necessitate  any  decrease  in  the 
volume  of  paper  currency. 

A  third  class  believed  that  resumption  could  best  be  obtained 
by  the  retirement  or  contraction  of  paper  currency.  In  this 
class  there  were  many  groups :  some  favoring  contraction  in 
one  way  and  some  in  another.  The  extreme  form  of  the 
theory  was  represented  by  Mr.  David  A.  Wells  in  the  so-called 
"  cremation  process "  :  "I  would  have  it  enjoined  upon  the 
secretary  of  the  treasury  to  destroy  by  burning  on  a  given  day 
of  every  week,  commencing  at  the  earliest  practical  moment, 
a  certain  amount  of  the  legal-tender  notes,  fixing  the  min- 
imum at  not  less  than  $500,000  per  week,  or  at  the  rate  of 
$26,000,000  per  annum.  This  process  once  entered  upon  and 
continued,  the  gradual  appreciation  of  the  greenback  to  par 
with  gold,  and  the  ultimate  equalization  of  the  two,  would 
not  be  a  question  of  fact  but  simply  of  time.  What  specific 
amount  of  contraction  of  the  legal  tender  would  be  necessary 
no  one  can  tell  with  certainty."  Another  somewhat  similar 
method,  known  as  the  graduated  scale  or  English  plan,  pro- 
posed to  redeem  United  States  notes  in  gold  outright  at  a 
fixed  scale  of  say  90  per  cent,  of  their  face  value.  The  objec- 
tion was  the  humiliation  of  the  government  going  into  the 
markets  of  the  world  to  buy  its  own  notes  at  a  discount. 

A  fourth  class  included  those  who  did  not  believe  in  im- 
mediate action,  but  stood  for  inactivity :  it  was  possible  that 
contraction  might  not  be  needed  to  attain  resumption  ;  and 
finance  ought  to  wait  while  industry  readjusted  itself  to 
the  needs  of  peace.  This  class  believed  that  resumption 
depended  upon  commercial  rather  than  upon  legislative  con- 
ditions, and  talked  hopefully  of  "  growing  up  to  specie  pay- 


§144]  Theories  of  Resumption.  337 

ments."  As  fast  as  the  great  West  was  opened  up  by  the 
Pacific  railways,  commercial  needs  and  mining  enterprises 
would  absorb  the  full  amount  of  existing  currency,  and  the 
outgo  of  gold  would  be  checked  by  a  favorable  balance  of 
trade  with  foreign  countries.  It  was  shown  that  the  stock 
of  gold  was  small  in  the  United  States ;  and  so  long  as  the 
export  of  specie  was  larger  than  the  annual  production  of  the 
gold  mines,  the  case  was  regarded  as  hopeless.  Senator  Sher- 
man thus  contrasts  the  advantage  of  a  waiting  policy  with  the 
contraction  policy  of  McCulloch  :  "  Both  of  us  were  in  favor 
of  specie  payments,  he  by  contraction  and  I  by  the  gradual 
advancement  of  the  credit  and  value  of  our  currency  to  the 
specie  standard.  With  him  specie  payments  was  the  primary 
object ;  with  me  it  was  a  secondary  object,  to  follow  the 
advancing  credit  of  the  government.  Each  of  us  was  in  favor 
of  the  payment  of  the  interest  of  bonds  in  coin  and  the  prin- 
cipal when  due  in  coin.  A  large  proportion  of  national  secu- 
rities was  payable  in  lawful  money  or  United  States  notes. 
He,  by  contraction,  would  have  made  this  payment  more 
difficult,  while  I,  by  retaining  the  notes  in  existence  would 
induce  the  holders  of  currency  certificates  to  convert  them 
into  coin  obligations  bearing  a  lower  rate  of  interest." 

Still  another  class,  at  first  small  but  soon  gathering  a  large 
following,  opposed  contraction  outright  and  advocated  a  freer 
use  of  paper  money.  The  inflationist  view  is  well  illustrated 
by  the  following  extracts  from  a  speech  made  in  Congress  in 
1868:  "I  am  distinctly  in  favor  of  expansion.  Our  cur- 
rency, as  well  as  everything  else,  must  keep  pace  with  our 
growth  as  a  nation.  My  plan  is  to  increase  our  circulation 
until  it  will  be  commensurate  with  the  increase  of  our  country 
in  every  other  particular.  .  .  .  Expansion  is  the  natural  law 
of  currency,  and  a  healthy  growth  as  a  nation.  .  .  .  Reduce 
the  currency  —  the  means  of  the  people  —  and  in  my  opinion 
you  are  fast  finding  the  road  to  universal  bankruptcy.  For 
my  part  I  would  issue  as  many  greenbacks  as  the  country  can 
carry, —  how  great  that  amount  may  be  I  will  not  pretend  to 


338         Funding  of  the  Indebtedness.       [§  145 

say."  According  to  this  view  resumption  was  both  unne- 
cessary and  undesirable.  Greenbacks  were  to  be  substituted 
for  all  bank-notes  and  the  interest-bearing  bonds  were  to  be 
retired  with  fresh  issues  of  government  money.  The  holders 
of  such  opinions  in  the  course  of  a  few  years  found  common 
ground  in  a  new  political  organization,  the  Greenback  Party. 

145.    Arguments  against  Contraction. 

So  important  was  the  question  of  the  paper  currency  after 
the  war  that  it  is  worth  while  to  state  further  in  detail  the 
arguments  against  contraction:  (1)  The  argument  of  private 
interest.  Prices  would  be  reduced  with  injurious  effects  upon 
trade,  possibly  resulting  in  a  panic.  Even  admitting  that  the 
note  issues  of  the  war  were  redundant,  contraction  would  only 
make  matters  worse ;  for  values  and  business  had  adjusted 
themselves  to  an  expanding  currency  without  interruption, 
and  reverse  steps  could  not  be  safely  undertaken  without 
affecting  debts  and  credit  contracts,  which  constitute  a  large 
part  of  property  rights.  The  government  and  the  debtor  class 
would  both  have  to  pay  in  a  dearer  currency  than  that  in  which 
their  debts  were  contracted  ;  as  money  decreases,  prices  shrink, 
but  debts  remain  constant  at  their  face  value. 

(2)  Arguments  of  governmental  interest.  Contraction 
would  reduce  the  public  revenues  through  a  distressed  con- 
dition of  commerce  and  industry,  affecting  employment,  con- 
sumption, and  import  of  commodities.  The  public  credit 
would  be  endangered  by  checking  the  funding  of  the  short- 
term  interest-bearing  securities  into  bonds  redeemable  within 
a  brief  period  at  the  pleasure  of  the  government  and  bearing 
a  low  rate  of  interest ;  only  when  currency  is  plentiful  and 
cheap  would  there  be  any  object  in  exchanging  it  for  bonds. 
"The  very  abundance  of  the  currency,"  said  Sherman,  "obvi- 
ously enables  us  to  fund  the  debt  at  a  low  rate  of  interest ; 
and  as  the  debt  was  contracted  upon  an  inflated  currency  it 
is  just  and  right  that  upon  that  same  currency  it  should  be 
funded  in  its  present  form."     Stress  was  also   laid  upon  the 


§  145]     Arguments  against  Contraction.       339 

advantage  of  a  loan  in  the  form  of  legal-tender  notes,  upon 
which  no  interest  was  paid. 

(3)  Argument  of  business  interest.  Contraction  would 
embarrass  the  banks  if  it  did  not  force  many  of  them  into 
liquidation  :  they  would  be  compelled  to  sell  the  government 
securities  in  Which  their  deposits  were  invested  and  also  to 
curtail  credits.  Further,  contraction  would  lower  the  rate  of 
foreign  exchange,  and  thus  reduce  exports  and  increase  im- 
ports. The  resumptionists  maintained,  in  direct  opposition 
to  this  argument,  that  the  inflation  of  irredeemable  paper 
money  must  infallibly  raise  prices  so  as  to  diminish  exports 
and  increase  imports.  Again  the  inflationists  argued  that 
more  currency,  rather  than  less,  was  needed,  because  of  the 
immense  area  of  the  country  to  be  developed  under  peace ; 
the  Southern  States  had  been  drained  of  a  monetary  me- 
dium, and  the  supply  in  the  West  was  deficient ;  with  the 
recuperation  of  the  South,  the  new  employment  of  dis- 
charged soldiers,  and  the  development  of  the  resources  of  the 
country,  the  increase  of  population  would  create  new  uses 
for  money. 

(4)  Argument  against  the  banks.  Another  line  of  argu- 
ment was  that  the  banks  had  as  much  to  do  as  any  action  of 
the  federal  government  with  the  depreciation  in  the  value  of 
paper  money,  and  that  it  was  a  serious  question  whether  the 
government  could  afford  to  resign  the  privilege  of  issue  to 
other  agencies.  The  circulation  of  the  national  banks,  it  was 
urged,  was  expanding  to  the  detriment  of  government  notes, 
and  consequently,  if  there  was  to  be  contraction,  a  beginning 
should  be  made  with  the  retirement  of  the  national  bank- 
notes rather  than  with  the  treasury  notes.  By  a  curious  slant 
of  mind  the  advocates  of  more  paper  money  insisted  that  the 
national  bank  circulation  of  $300,000,000  was  not  needed : 
"It  is  so  much  over  and  above  what  the  country  can  use 
to  advantage.  Its  existence  does  infinite  mischief,  and  while 
it  continues  must  effectually  prevent  any  return  to  specie 
payments." 


34°         Funding  of  the  Indebtedness.       [§  146 

146.    Funding  Act  of  April  12,  1866. 

The  first  legislative  step  taken  by  Congress  toward  a  general 
reorganization  of  the  debt  was  the  act  of  April  12,  1866,  em- 
bodying two  important  features  :  first,  power  to  convert  tem- 
porary and  short-time  interest-bearing  securities  into  long-term 
bonds  already  authorized  under  previous  bond  acts ;  secondly, 
a  slight  contraction  of  the  United  States  notes.  Under  the  first 
provision  McCulloch  proceeded  at  once  to  convert  the  tem- 
porary interest-bearing  obligations  into  6  per  cent,  five -twenty 
bonds,  and  made  such  rapid  progress  that  in  two  years  the  volume 
of  this  species  of  indebtedness  had  been  decreased  $900,000,- 
000.  The  temporary  loans  and  certificates  of  indebtedness 
were  also  wiped  off  the  books  of  the  treasury  department. 
An  examination  of  the  table  on  the  opposite  page  clearly  shows 
the  changes  in  the  several  loans. 

In  dealing  with  the  United  States  legal  tenders,  Congress 
was  cautious  and  carefully  held  the  secretary  in  check ;  a 
grudging  authority  was  given  to  retire  $10,000,000  of  green- 
backs within  six  months,  and  not  more  than  $4,000,000  in  any 
one  month  thereafter.  Whether  the  method  of  a  gradual  and 
discretionary  retirement  of  legal  tenders  was  a  wise  solution  or 
not,  it  placed  a  heavy  burden  of  unpopularity  upon  the  secre- 
tary of  the  treasury :  if  currency  was  scarce  the  secretary  was 
blamed,  and  if  it  was  redundant  he  was  charged  with  inflating 
prices.  The  question  of  resumption  was  thus  kept  unsettled  j 
the  country  remained  in  uncertainty  as  to  the  date  of  a  return 
to  specie  payments ;  and  this  encouraged  speculation  in  busi- 
ness affairs.  It  would  have  been  better  to  provide  for  the 
note-holder  as  well  as  for  the  bond- holder  by  giving  a  right 
to  convert  the  greenbacks  into  bonds,  thus  lifting  the  notes  by 
gradual  advance  of  public  credit  to  par  with  gold.  Certainly 
a  great  opportunity  was  lost,  for  public  sentiment  in  the  winter 
of  1866  would  have  sustained  a  more  rapid  contraction;  the 
country  at  large  was  expecting  it,  and  the  deed  might  have 
been  accomplished  if  Congress  had  had  enough  courage. 


146]     Funding  Act  of  April  12,  1866.      341 


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342         Funding  of  the  Indebtedness.       [§  146 

The  authorized  measure  of  contraction  gave  but  slight  satis- 
faction to  Secretary  McCulloch  ;  but  he  publicly  expressed  a 
hopeful  outcome  and  predicted  that  resumption  might  be 
brought  about  by  July  1,  1868.  Conditions  were  against  him  : 
in  1866  there  was  a  poor  grain  crop,  frauds  in  the  revenue,  a 
disastrous  panic  in  England  which  required  a  withdrawal  of 
capital  from  America,  and  unexpected  expenses  on  account 
of  Indian  hostilities  and  military  governments  in  the  Southern 
States.  Besides  these  difficulties  the  secretary  had  to  meet 
an  aggressive  and  growing  opposition  in  Congress.  This 
opposition  was  an  early  symptom  of  deep-seated  dissatisfaction 
throughout  the  country,  a  dissatisfaction  incident  to  the  diffi- 
cult years  of  readjustment  to  peace  conditions.  Discontent 
was  strongest  in  the  agricultural  sections,  where  farmers  had 
incurred  indebtedness  on  the  long-time  credits.  Mortgages 
running  for  three,  five,  or  even  ten  years  were  not  uncommon. 
Farmers  in  the  East  were  encouraged  to  larger  enterprises  by 
the  high  prices  of  agricultural  products  existing  at  the  close 
of  the  war ;  new  settlers  were  lured  westward  by  the  glowing 
descriptions  circulated  by  railroads  which  with  marvellous 
energy  were  completing  their  network  of  systems  in  the 
middle  West  and  even  stretching  out  feelers  into  the  immense 
domain  across  the  Mississippi  toward  the  Pacific.  Thousands 
of  war  veterans,  hardened  to  adventure  and  reluctant  to  turn 
back  to  the  quiet  life  of  the  East,  pushed  to  the  frontier  for 
the  making  of  homes.  Wages  of  labor,  in  mechanical  and 
mining  industries,  were  forced  to  a  high  level.  Many  of 
these  new  ventures  were  doomed  to  disappointment;  and, 
as  is  inevitably  the  case  when  economic  disturbances  are 
wide-spread  and  uniform  in  character,  the  blame  was  placed 
upon  the  government,  and  from  it  relief  was  invoked.  A 
complete  list  of  the  financial  propositions  put  forth  at  the 
period  is  beyond  enumeration  in  a  work  of  this  character ; 
chief  among  those  proposals  are  to  be  noted  the  follow- 
ing:  — 


§  H7j       Abandonment  of  Contraction.        343 

(1)  Increase  of  government  currency. 

(2)  Payment  of  bonds  in  currency  instead  of  in  coin. 

(3)  Taxation  of  United  States  securities. 

(4)  Suppression  of  national  bank  currency. 

The  first  of  these  three  controversies  must  be  discussed  be- 
fore describing  the  funding  act  of  1870;  the  fourth,  con- 
current with  the  others,  will  be  referred  to  in  a  subsequent 
chapter. 

147.    Abandonment  of  Contraction. 

Within  a  few  months  after  the  passage  of  the  contraction 
act  an  agitation  was  under  way  to  prevent  any  further  with- 
drawal of  notes.  The  difficulties  engendered  by  the  English 
panic  in  May,  1866,  furnished  effective  arguments.  McCulloch 
and  the  contractionists  were  driven  to  the  defensive  and  with 
difficulty  prevented  inflation.  In  the  House  a  bill  was  passed 
authorizing  the  redemption  of  compound-interest  notes  by  a 
new  issue  of  non-interest  legal-tender  notes  not  exceeding 
§100,000,000.  Influenced  by  the  hostility  displayed  in  the 
votes  upon  this  and  similar  measures,  by  anxious  foreboding 
of  coming  financial  troubles,  by  the  task  of  funding  the 
interest-bearing  notes,  as  well  as  by  the  unfortunate  economic 
conditions  already  referred  to,  McCulloch  deemed  it  wise  not 
to  persist  in  the  discretionary  use  of  the  powers  granted  by 
the  law  of  1866  authorizing  the  retirement  of  notes.  Never- 
theless the  secretary  was  not  discouraged ;  in  December, 
1867,  he  admitted  the  impossibility  of  resumption  in  the 
following  July,  but  he  hoped  that  with  good  crops  and  n& 
unfavorable  legislation  it  might  be  accomplished  a  year  later. 
McCulloch's  hopefulness,  however,  counted  for  little  as  against 
the  general  uneasiness  of  the  country,  and  he  could  not  pre- 
vent the  enactment  of  a  measure  by  large  majorities  in  both 
branches  of  Congress,  February  4,  1868,  suspending  any 
further  reduction  of  the  currency.  By  this  act  the  policy  of 
gradual  contraction  was  condemned. 

During  the  two  years  in  which  contraction  was  carried  on, 


344         Funding  of  the  Indebtedness.       [§  148 

$44,000,000  in  greenbacks  were  retired,  but  many  asserted 
that  the  full  measure  of  actual  contraction  included  also  the 
withdrawal  of  the  compound-interest  notes ;  Sherman  for  ex- 
ample maintained  that  the  active  circulation  was  lessened  by 
$140,000,000;  Sumner  placed  the  reduction  at  $160,000,000. 
During  the  earlier  years  of  the  issue  of  interest-bearing  notes, 
temporary  securities  had  to  some  extent  swollen  the  volume 
of  currency,  but  later,  when  peace  was  restored,  they  were 
held  almost  exclusively  by  banks  for  purposes  of  investment, 
and  it  is  very  doubtful  whether  they  should  be  regarded  as 
part  of  the  circulating  medium.  Notwithstanding  these  con- 
siderations the  public  generally  agreed  with  Sherman  and 
Sumner,  and  the  contractionists  were  obliged  to  carry  the 
responsibility  for  disturbances  which  were  really  incident  to 
the  refunding  of  temporary  indebtedness. 

148.     Payment  of  Bonds  in  Currency. 

Another  assault  upon  national  credit  was  made  in  the  de- 
mand that  bonds  should  be  redeemed  in  paper  money  instead 
of  in  coin,  unless  there  was  an  express  stipulation  to  the 
contrary  in  the  authorization  of  the  particular  loan.  If  we 
leave  out  of  account  the  sensitive  character  of  government 
credit,  the  complication  of  international  fiscal  relations,  the 
need  of  government  provision  for  future  credits,  there  might 
appear  to  be  some  reason  in  the  plea  that  the  five-twenty 
bonds  be  paid  in  greenbacks.  The  facts  in  regard  to  the 
several  issues  of  bonds  were  substantially  as  follows  : 

In  the  loan  acts  of  July  and  August,  1861,  no  mention 
whatever  was  made  in  regard  to  the  medium  of  payment,  but 
this  was  before  the  suspension  of  specie  payments  or  issue  of 
legal-tender  notes.  The  law  of  February  25,  1862,  expressly 
appropriated  coin  received  in  customs  duties  "  to  the  payment 
in  coin  of  the  interest  on  the  bonds  and  notes  of  the  United 
States,"  and  also  to  the  annual  "purchase  or  payment  of  1 
per  cent,  of  the  entire  debt."  The  act  of  March  3,  1863, 
under  which  $75,000,000  of  6  per  cent,  bonds  were  issued, 


§  148]    Payment  of  Bonds  in  Currency.       345 

expressly  provides  that  such  bonds  shall  be  payable,  principal 
and  interest  "in  coin."  The  act  of  March  3,  1864,  under 
which  the  ten- forty  5  per  cents,  were  issued,  contained  a 
similar  provision.  The  act  of  June  30,  1864,  under  which 
$125,561,300  five-twenty  6  per  cent,  bonds  were  issued,  con- 
tained no  coin  provision  as  to  the  principal  but  did  provide 
that  the  interest  be  paid  in  coin.  The  act  of  March  3,  1865, 
under  which  $203,327,250  five-twenties  and  $332,998,950 
of  consols  of  1865  were  sold,  was  also  silent  as  to  principal 
but  provided  for  coin  payment  of  interest.  Under  this  act 
additional  loans  were  made,  known  as  consols  of  1867,  and 
consols  of  1868. 

It  is  thus  seen  that  large  bond  issues  were  negotiated  under 
laws  which  were  silent  as  to  the  currency  in  which  the  prin- 
cipal should  be  paid.  There  was  obscurity  in  regard  to  the 
medium  of  payment  at  the  normal  time  of  redemption ;  and 
the  paper  redemptionists  particularly  relied  upon  the  circum- 
stances under  which  the  act  of  1862  was  passed.  This  act 
provided  for  the  issue  of  legal-tender  notes  which  were  con- 
vertible into  bonds,  and  also  provided  that  these  notes  should 
be  a  legal  tender  in  payment  of  all  debts,  public  and  private 
within  the  United  States,  except  duties  on  imports  and  inter- 
est of  bonds.  It  was  therefore  argued  that  since  the  laws 
issuing  the  legal-tender  notes  provided  that  such  notes  be 
received  in  payment  of  all  claims  against  the  United  States 
of  any  kind  whatsoever  except  interest  on  bonds ;  and  since 
no  explicit  exception  was  made  as  to  their  use  in  the 
payment  of  the  principal  of  the  bonds,  it  was  obviously 
intended  that  greenbacks  should  be  used  for  the  redemption 
of  the  bonds.  Some  indeed  contended  that  the  omission  of 
any  express  provision,  except  as  to  interest,  was  an  intentional 
reserve  on  the  part  of  the  government,  to  be  free  to  avail  itself 
of  the  privilege  of  redeeming  the  bonds  in  currency  during 
the  suspension  of  specie  payments ;  and  that  with  this  end  in 
view  the  bonds  were  practically  made  payable  at  the  option  of 
the  government  at  the  expiration  of  five  years  from  date  of 


346         Pounding  of  the  Indebtedness.      ■[§  148 

issue  in  whatever  might  then  be  the  legal  tender  of  the 
country.  The  government,  it  was  urged,  should  have  the 
opportunity  of  taking  up  its  obligations  in  the  same  depre- 
ciated paper  for  which  it  issued  them,  and  of  re-negotiating 
its  loans  under  the  circumstances  of  improved  credit. 
■  An  illustration  of  a  prevalent  feeling  as  to  the  payment  of 
debt  is  found  in  President  Johnson's  message  of  1868,  when 
he  suggests  that,  inasmuch  as  the  holders  of  government  secu- 
rities had  received  upon  their  bonds  a  larger  amount  than 
their  original  investment  as  measured  by  gold,  it  would  be  just 
that  the  6  per  cent,  interest  then  paid  should  be  applied  to 
the  reduction  of  the  principal  of  the  debt,  thus  liquidating  the 
entire  amount  in  sixteen  years  and  eight  months ;  public 
creditors  ought  to  be  satisfied  with  a  fair  and  liberal  compen- 
sation for  the  use  of  their  capital.  "The  lessons  of  the  past 
admonish  the  lender  that  it  is  not  well  to  be  over-anxious  in 
exacting  from  the  borrower  rigid  compliance  with  the  letter 
of  the  bond." 

Apart  from  the  phraseology  of  the  statutes  it  appears  that 
during  the  early  years  of  the  war  the  possibility  of  the  payment 
of  bonds  in  other  than  coin  was  hardly  raised.  According  to 
the  explicit  statement  of  Garfield  in  1868,  when  the  original 
five-twenty  bond  bill  was  before  the  House  in  1862,  all  who 
referred  to  the  subject  stated  that  the  principal  of  these  bonds 
was  payable  in  gold,  and  coin  payment  was  the  understanding 
of  every  member  of  the  committee  of  ways  and  means.  It 
was  only  because  of  an  occasional  doubt  then  expressed  that 
it  was  considered  necessary  "from  abundant  caution  "  to  make 
a  definite  promise  in  the  ten-forty  act  of  1863.  Chase,  who 
undertook  the  negotiation  of  bonds,  had  advertised  that  the 
principal  as  well  as  interest  would  be  paid  in  coin,  and  the 
government  did  not  correct  this  non-statutory  notice.  It  thus 
became  practically  an  unwritten  law  to  pay  the  obligations  of 
the  United  States  in  coin. 

Secretary  McCulloch  contended  that  the  credit  of  the 
five-twenties  issued  under  the  act  of  March  3,  1865,  would 


§  148]     Payment  of  Bonds  in  Currency.       347 

be  improved  by  an  express  declaration  of  Congress  that 
coin  should  be  paid  :  faith  and  public  honor  demanded  that 
the  contracts  of  the  government  be  complied  with  in  the 
spirit  in  which  they  were  made.  Even  without  further  legis- 
lative sanction  by  Congress,  neither  Chase  nor  McCulloch 
ever  exercised  any  option ;  the  six  per  cents,  which  matured 
in  January,  1863,  were  paid  in  gold,  and  under  date  of 
November  15,  1866,  McCulloch  announced  that  the  five- 
twenty  bonds  of  1862  would  either  be  called  in  at  the  ex- 
piration of  five  years  from  that  date  and  paid  in  coin,  or 
would  be  permitted  to  run  until  the  government  was  prepared 
to  pay  them  in  coin.  Apart  from  these  technical  considera- 
tions there  was  a  still  more  vital  objection  to  payment  in 
depreciated  currency  ;  when  the  legal  tenders  were  issued  it 
was  supposed  that  they  would  be  but  temporary  and  would  be 
promptly  redeemed  at  the  close  of  the  war,  and  the  possibility 
of  using  them  for  bond  payment  had  hardly  occurred  to  any 
one.  Until  therefore  the  government  discharged  its  green- 
back obligations  by  raising  them  in  value  to  gold,  it  was  dis- 
honorable to  force  a  currency  payment  upon  the  bondholder. 
Notwithstanding  the  established  policy  of  the  government 
and  the  general  understanding  of  the  investing  public,  a  per- 
sistent agitation  to  secure  payment  in  currency  gained  many 
adherents  in  1868.  This  time  the  argument  took  on  more 
extravagant  forms :  it  was  urged  that  the  bondholders  had 
taken  advantage  of  the  national  distress ;  that  the  currency  of 
the  ploughholder  was  equally  good  for  the  bondholder ;  that 
the  people  were  sorely  burdened  ;  that  the  bonds  did  not 
specify  in  what  special  currency  they  were  to  be  paid ;  that  it 
would  therefore  be  "  right  "  to  pay  them  in  lawful  money  of 
the  United  States,  and  that  if  we  looked  in  the  dictionary 
under  the  word  "  lawful  "  and  under  the  word  "  money  "  we 
would  find  that  lawful  money  meant  greenbacks ;  that  anyhow, 
no  matter  what  it  meant,  the  people  would  never  consent  to 
pay  the  bonds  in  coin,  and  that  the  bondholder  had  better 
make  the   best  terms   he  could   while  compromise  was  still 


348         Funding  of  the  Indebtedness.       [§  148 

possible.  Said  Thaddeus  Stevens  :  "  I  want  to  say  that  if  this 
loan  was  to  be  paid  according  to  the  intimation  of  the  gentle- 
man from  Illinois,  —  if  I  knew  that  any  party  in  the  country 
would  go  for  paying  in  coin  that  which  is  payable  in  money, 
thus  enhancing  it  one -half,  —  if  I  knew  there  was  such  a  plat- 
form and  such  a  determination  this  day  on  the  part  of  my 
party,  I  would  vote  for  the  other  side,  Frank  Blair  and  all.  I 
would  vote  for  no  such  swindle  upon  the  tax-payers  of  this 
country ;  I  would  vote  for  no  such  speculation  in  favor  of 
the  large  bondholders,  the  millionaires,  who  took  advantage 
of  our  folly  in  granting  them  coin  payment  of  interest." 

This  interpretation  of  the  obligations  of  the  government 
found  its  principal  support  in  the  interior  and  Middle  Western 
States.  Ohio  championed  the  proposition  so  warmly  that  it 
was  popularly  known  as  "  The  Ohio  idea."  Its  opponents  de- 
risively dubbed  it  the  "  rag  baby."  Each  of  the  political 
parties  was  affected  and  for  a  time  the  bondholder  was  in 
peril.  Even  Senator  Sherman,  whose  career  on  the  whole 
stood  for  sound  and  trustworthy  finance,  supported  a  bill  to 
compel  holders  of  the  disputed  6  per-cent.  five-twenty  bonds 
to  accept  a  5  per  cent,  security  specifically  payable  in  gold, 
and  advised  its  adoption  as  a  prevention  of  a  worse  measure. 

This  doctrine  of  bond  payment  by  currency  instead  of  by 
coin  was  incorporated  into  the  platform  of  the  national  Demo- 
cratic Party  in  1868,  although  it  did  not  gain  endorsement 
from  all  elements  in  the  party.  The  confusion  is  seen  in  the 
fact  that  Horatio  Seymour  of  New  York,  who  was  not  in  accord 
with  the  financial  plank  of  the  platform,  was  selected  for  presi- 
dential candidate.  The  Republican  party  in  its  national  con- 
vention denounced  the  plan,  and  yet  several  Republican  State 
conventions  showed  sympathy  with  the  idea.  Not  only  did 
Butler  of  Massachusetts  accept  it,  but  some  Republican  leaders, 
as  Morton  of  Indiana  and  Sherman  of  Ohio,  compromised  by 
declaring  that  the  government  had  the  right  to  redeem  the 
principal  of  the  debt  in  existing  currency  but  did  not  have  the 
right  to  make  a  new  issue  of  currency  for  that  purpose. 


§  148]    Payment  of  Bonds  in  Currency.       349 

The  Republicans  won  in  the  election  of  18683  in  1869 
President  Grant  proceeded  promptly  to  redeem  the  declara- 
tions of  his  party.  In  unmistakable  words  in  his  inaugural 
address  he  declared  that  the  national  honor  must  be  protected 
by  paying  every  dollar  of  government  indebtedness  in  gold, 
unless  it  was  otherwise  stipulated  in  the  contract.  The  first 
measure  passed  in  his  administration,  on  March  18,  1869, 
pledged  the  faith  of  the  United  States  to  the  payment  in  coin 
or  its  equivalent  of  all  the  obligations  of  the  United  States, 
except  when  other  provision  had  been  made  in  the  law  author- 
izing the  issue.  The  apprehension  of  investors  was  relieved, 
and  refunding  at  lower  rates  of  interest  was  greatly  facilitated ; 
although  in  1870  another  wave  of  restlessness  spread  over  the 
country,  marked  in  Congress  by  the  introduction  of  nearly  fifty 
bills  expressing  every  shade  of  financial  opinion,  government 
credit  was  not  seriously  affected. 

Thus  far  the  question  of  payment  of  bonds  has  been  dis- 
cussed from  the  standpoint  of  justice  to  the  bondholder,  and 
of  advantage  to  the  credit  of  the  government  by  not  standing 
on  the  letter  of  the  statute.  It  has  been  asked  whether  the 
government,  at  the  time  of  issue,  might  not  have  expressly 
stated,  in  terms  so  clear  there  could  be  no  misunderstanding, 
that  in  redeeming  the  bonds  it  would  pay  either  in  its  own 
notes  or  specie.  As  one  critic  states  it,  "  Should  not  green- 
backs have  been  sufficiently  good  for  all  purposes,  for  the 
soldier  as  well  as  for  the  capitalist,  for  the  porter  as  well  as 
for  the  manufacturer?"  The  answer  is  clear:  The  govern- 
ment would  have  failed  to  secure  credit  on  a  paper  basis; 
it  needed  the  best  security  it  could  offer ;  and  for  a  time  that 
appeared  none  too  good.  While  the  method  followed  un- 
doubtedly placed  a  heavy  load  upon  the  people  and  re- 
sulted in  the  enriching  of  a  special  class  so  fortunate  as  to 
possess  at  the  time  funds  for  investment,  the  other  method 
of  supporting  the  finances  entirely  on  promises  must  have 
resulted  in  even  greater  embarrassment  than  was  actually 
experienced. 


350         Funding  of  the  Indebtedness.       [§  149 

149.    Taxation  of  Bonds. 

The  value  of  the  obligations  of  the  government  was  attacked 
in  still  another  way  by  the  demand  that  bonds  should  be 
subjected  to  local  taxation.  The  judicial  history  of  this  sub- 
ject is  of  interest,  the  earlier  decisions  of  the  Civil  War 
period  resting  upon  the  opinion  delivered  by  Chief  Justice 
Marshall  in  the  case  of  Weston  v.  Chartestown,  in  1829. 
The  question  then  before  the  court  was  whether  the  stock 
issued  for  loans  made  to  the  government  of  the  United  States 
is  liable  to  be  taxed  by  States  and  corporations.  The  court 
denied  such  power,  and  Marshall  again  placed  on  record  the 
reasoning  so  powerfully  expressed  in  his  decision  in  the  case 
of  McCulloch  v.  State  of  Maryland,  in  regard  to  the  necessity 
of  protecting  the  national  government  in  the  free  and  unhin- 
dered exercise  of  all  its  powers.  In  the  case  of  Bank  of 
Commerce  v.  New  York  City  (1862)  the  court  decided  that 
the  capital  stock  of  a  State  bank  invested  in  stock  of  the 
United  States  was  exempt  from  local  taxation  imposed  by  the 
city  of  New  York;  and  again  in  1864  in  the  Bank  Tax  case, 
after  the  State  of  New  York  had  passed  a  statute  taxing  banks 
in  that  State  whose  capital  was  invested  in  bonds  of  the  United 
States  "  on  a  valuation  equal  to  the  amount  of  this  capital  stock 
paid  in  or  secured  to  be  paid  in,"  the  court  decided  that  no 
distinction  could  be  made  between  "  capital  at  valuation  "  and 
"  the  property  in  which  the  capital  had  been  invested,"  thus 
denying  the  power  of  the  State  to  tax  indirectly  the  government 
securities.  After  the  revision  of  the  national  banking  act, 
June  3,  1864,  the  question  assumed  a  slightly  different  form, 
for  Congress  expressly  gave  the  States  power  to  tax  shares  of 
stock  in  a  national  bank,  provided  that  the  tax  so  imposed  did 
not  exceed  the  rate  imposed  upon  the  shares  of  banks  organ- 
ized under  State  authority.  This  permission,  however,  still 
left  private  bondholders  in  a  favored  position  and  created 
dissatisfaction. 

The  earlier  attempts  to  tax  bonds  did  not  spring  from  an- 


§149]  Taxation  of  Bonds.  351 

tagonism  to  bondholders  as  such,  but  from  a  desire  to  compel 
the  owners  of  property  bound  up  in  national  securities  to  con- 
tribute some  share  to  local  burdens.  Gradually  emphasis  was 
laid  upon  the  fact  that  the  bondholder  had  bought  the  bonds 
at  specially  favorable  rates ;  that  they  received  an  exceptional 
rate  of  interest ;  that  as  interest  was  payable  in  gold  com- 
manding a  premium  which  in  itself  yielded  a  large  profit,  they 
were  a  favored  class;  that  their  property  was  not  actively 
employed  in  the  production  of  wealth ;  and  in  short  that  they 
constituted  that  national  banking  interest  which  came  to  be 
generally  regarded  as  a  privileged  institution.  Many  bond- 
holders indeed  during  the  Civil  War  acknowledged  that  taxa- 
tion of  bonds  would  be  wise  not  only  on  grounds  of  justice,  but 
also  for  the  public  good  because  it  would  remove  irritation. 

Finally  as  the  attack  upon  the  financial  policy  grew  more 
and  more  bitter,  charges  were  freely  made  as  to  unfair  class 
divisions  and  burdens.  The  great  body  of  the  people  were 
pictured  as  working  with  their  own  hands  through  all  the 
weary  days  of  the  year,  while  the  owners  of  idle  capital,  favor- 
ites of  fortune  and  special  legislation,  like  the  lilies,  toiled  not, 
and  yet  surpassed  kings  in  the  splendor  of  their  habits  and 
luxuries.  The  farmer  and  mechanic  toiled  at  home  to  meet 
the  exactions  of  the  tax  gatherer,  while  those  whose  hands 
were  unstained  with  labor  shaped  the  legislation  of  the  country 
for  the  purpose  of  private  gain  and  individual  monopoly. 
Amid  the  roar  of  cannon  and  deluge  of  blood  the  capitalists 
trafficked  for  a  profit  of  one  hundred  per  cent. ;  over  against 
this  selfishness  stood  the  patriotism  of  the  soldier  and  the 
anguish  of  weeping  firesides.  So  with  taxation :  contrast 
the  exactions  from  the  workers  with  the  policy  which  exempts 
one -tenth  of  the  property  of  the  United  States,  —  property 
that  cost  less  by  one-half  than  any  other  to  obtain,  which 
yields  double  the  interest  elsewhere  derived,  and  which  is 
owned  by  those  who  live  in  palaces. 

In  opposition  to  such  views  insistence  was  laid  upon  the 
sanctity   of  contract ;   the   bondholders   were   public- spirited 


352         Funding  of  the  Indebtedness.       [§  150 

men  who  had  contributed  their  property  in  the  days  of  the 
country's  distress;  the  large  proportion  of  the  bonds  were 
held  by  investors  with  small  means ;  a  large  block  of  bonds 
was  held  abroad,  and  it  was  absurd  to  attempt  to  tax  the  sub- 
jects of  Great  Britain,  France,  or  Germany.  Explanations  of 
this  character  did  not  appeal  to  all ;  possibly  it  would  have 
been  wiser  at  the  time  of  issuing  bonds  to  have  placed  them 
on  the  same  basis  as  other  property.  The  exemption  certainly 
made  an  invidious  distinction  and  contributed  much  to  the 
difficulties  of  financial  legislation.  This  feeling  grew  in  strength 
after  the  war  was  over,  when  it  was  no  longer  necessary  to 
bolster  up  the  credit  of  the  government  by  extraordinary 
means. 

150.    The  Refunding  Act  of  1870. 

McCulloch  retired  from  the  treasury  department  in  March, 
1869,  and  was  succeeded  by  George  S.  Boutwell  of  Massa- 
chusetts. Boutwell  had  long  been  in  public  service,  including 
the  office  of  bank  commissioner  of  Massachusetts  and  com- 
missioner of  internal  revenue,  and  since  1863  he  had  been  a 
representative.  Experienced  and  well-informed  on  financial 
questions,  he  made  it  his  chief  object  to  fund  the  public  debt 
at  a  lower  rate  of  interest.  He  was  convinced  that  so  long  as 
the  flow  of  gold  was  adverse  there  could  be  no  effective  re- 
sumption ;  his  preference  for  funding  received  popular  support 
because  there  was  a  widespread  sentiment  that  the  payment  of 
6  per  cent,  interest  was  discreditable  to  the  reputation  of  the 
United  States,  inasmuch  as  European  nations,  with  their  com- 
plicated relations  and  expensive  forms  of  government,  were 
borrowing  money  at  a  lower  rate  ;  it  was  absurd  to  continue 
a  war  rate  of  interest  in  times  of  peace  !  It  was  also  urged 
that  the  high  rate  of  interest  offered  by  the  government 
operated  unjustly  upon  industry  in  attracting  capital  away 
from  real  estate  and  industrial  enterprises. 

The  time  for  refunding  seemed  favorable  :  the  party  in 
power  was  the  party  under  which  the  debt  had  been  incurred ; 


§150]       The  Refunding  Act  of  1870.  353 

the  act  of  1869  had  strengthened  the  public  credit,  and  about 
$1,600,000,000  of  five-twenty  bonds  were  already  or  soon 
would  be  redeemable  at  the  pleasure  of  the  government.  In 
his  first  report,  December,  1869,  Boutwell  presented  a  detailed 
plan  of  funding  the  debt  and  suggested  a  rate  of  interest  of 
4^  per  cent.  This  was  followed  by  the  important  legislation 
embraced  in  the  acts  of  July  14,  1870,  and  January  20,  1871, 
authorizing  the  issue  of  $500,000,000  bonds  at  5  per  cent., 
redeemable  after  ten  years;  $300,000,000  at  4^  per  cent., 
redeemable  after  fifteen  years;  and  $1,000,000,000  at  4  per 
cent.,  redeemable  after  thirty  years,  all  to  be  paid  in  coin  and 
exempt  from  national  as  well  as  local  taxation ;  none  to  be 
sold  at  less  than  par  in  gold. 

The  bill  as  originally  reported  by  the  finance  committee  of 
the  Senate  provided  that  the  longest  bond  should  be  redeem- 
able within  twenty  years,  thus  adopting  the  American  policy 
of  early  convertibility ;  stress  was  laid  upon  the  doctrine  that 
there  should  be  no  permanent  national  debt,  and  that  the 
first  and  most  urgent  duty  in  time  of  peace  was  to  discharge 
promptly  the  obligations  incurred  in  time  of  war.  Thus  the 
Louisiana  debt  of  1803  was  reimbursable  within  fifteen  years; 
the  war  loans  of  181 2-1 815  within  twelve  years;  down  to  the 
Civil  War  no  loan  ever  ran  beyond  twenty  years  ;  and  Chase 
had  compelled  the  right  of  optional  payment  within  five  or  ten 
years  at  the  utmost.  The  House  of  Representatives,  however, 
in  order  to  give  the  bonds  greater  acceptability  to  capitalists 
insisted  that  the  4  per  cent,  bonds  should  run  for  thirty  years. 
Securities  were  thus  created  which  unexpectedly  went  within 
no  long  period  to  a  premium  of  more  than  25  per  cent,  and 
afterwards  when  there  was  a  large  and  growing  surplus  in  the 
treasury  it  was  difficult  to  retire  the  debt.  Long  before  the 
bonds  matured  the  government  could  borrow  at  a  rate  as  low 
as  2^£  per  cent. 

This  legislation  together  with  the  supplementary  acts  of 
December  17,  1873,  January  14,  1875,  and  March  3,  1875, 
shaped  the  character  of  the  debt  for  the  next  quarter  of  a 

23 


354         Funding  of  the  Indebtedness.      [§151 

century.  It  settled  once  for  all  the  question  of  taxation  of 
bonds,  and  placed  public  credit  upon  a  solid  foundation.  In 
one  particular,  however,  it  was  ambiguous  and  opened  the  way 
to  a  new  controversy.  The  funding  act  of  1870  uses  the  term 
"coin"  and  not  gold.  In  1870  silver  was  at  a  premium  with 
gold  in  the  bullion  market ;  in  later  years  as  will  be  seen  the 
silver  advocates  asserted  that  it  was  honorable  to  redeem  the 
bonded  indebtedness  in  silver  dollars  as  well  as  in  gold.  In- 
asmuch as  the  word  "  coin  "  after  discussion  was  deliberately 
substituted  for  "gold,"  there  was  point  in  their  contention,  so 
far  as  their  argument  rests  upon  purely  technical  considera- 
tions, whatever  may  be  the  judgment  of  a  deeper  appreciation 
of  the  fundamental  forces  which  control  public  credit. 

To  many  people  the  attempt  to  carry  the  public  debt  at 
less  than  5  per  cent,  appeared  foolish  ;  even  Senator  Sherman 
thought  that  the  proposed  reduction  of  the  rate  of  interest  to 

4  per  cent,  was  practically  the  defeat  of  the  measure.  For 
a  few  years  during  the  unsettled  conditions  of  commerce, 
industry,  and  finance,  this  prediction  on  the  whole  seemed 
justified,  for  conversion  was  slow.  The  five-twenties  of  1862 
were  first  attacked,  but  the  work  of  converting  them  into  the 

5  per  cent,  bonds  due  in  1881  was  not  finished  until  1876  ; 
attention  was  then  turned  to  the  later  five-twenties  of  1865, 
1867,  and  1868.  By  this  time  the  rate  of  interest  had  fallen 
and  it  was  possible  to  complete  the  funding  in  1879  ;  fortu- 
nately no  limitations  as  to  the  time  of  refunding  were  placed 
in  the  act.     The  changes  are  seen  in  the  table,  page  341. 

151.    Sale  of  Bonds  Abroad. 

In  connection  with  the  refunding  scheme  an  interesting 
attempt  was  made  by  the  treasury  department  to  sell  govern- 
ment bonds  by  direct  negotiation  abroad.  During  the  Civil 
War  earnest  efforts  had  been  made  to  borrow  from  foreigners, 
but  there  had  been  little  encouragement  for  a  steady  market. 
Mr.  R.  J.  Walker,  formerly  secretary  of  the  treasury  under 
Polk,  was  sent  by  Chase  as  a  special  revenue  agent  to  Europe, 


§  i si]  Sale  of  Bonds  Abroad.  355 

and  found  strong  distrust  of  the  financial  credit  of  our  govern- 
ment. So  bitter,  indeed,  was  the  hostility  of  Louis  Napoleon 
and  Lord  Palmerston  that  United  States  stocks  could  find  no 
place  either  on  the  London  or  Paris  stock  exchange,  although 
the  Confederate  loan  was  quoted  in  Europe  at  nearly  par  in 
gold.  To  this  political  hostility  was  added  a  growing  suspicion 
of  American  credit  due  to  the  successive  issues  of  treasury 
notes.  Even  in  Holland  there  were  doubts  of  the  financial 
good  sense,  if  not  of  the  good  faith,  of  the  American  govern- 
ment. While  the  war  lasted,  therefore,  but  little  foreign 
capital  was  transferred  to  the  United  States ;  but  when  peace 
was  established  European  funds  were  rapidly  turned  westward 
and  government  bonds  were  sold  abroad  in  large  quantities 
until  the  agitation  began  for  the  payment  of  bonds  in  currency 
instead  of  gold. 

In  the  minds  of  many  people  in  the  United  States  there  was 
a  strong  prejudice  against  borrowing  money  abroad,  because 
it  was  derogatory  to  the  American  people  to  appeal  to  other 
peoples  for  aid.  In  an  early  debate  after  peace  was  restored, 
Mr.  Kelley,  a  representative  from  Pennsylvania,  opposed  a 
foreign  loan,  because,  after  sustaining  a  war  without  resorting 
to  the  degradation  of  borrowing  abroad,  the  United  States 
should  not  ask  foreigners  to  loan  money  at  5  per  cent,  in 
order  to  redeem  a  non-interest-bearing  loan.  In  particular 
he  denounced  the  proposed  issues  of  bonds  payable  in  France, 
Germany,  England,  or  elsewhere,  in  francs,  florins,  or  pounds, 
"  a  proposition  that  would  call  a  flush  to  the  cheeks  of  the 
directors  of  an  embarrassed  railroad  company."  More  serious 
objections  were  urged  against  foreign  loans :  that  the  profit 
represented  by  the  margin  between  paper  and  gold  ought  to 
be  secured  by  Americans ;  that  foreign  loans  would  drain  the 
whole  country  of  gold  and  silver,  which  would  have  to  be  paid 
out  in  interest  to  aliens  and  absentees ;  that  bonds  would  be 
returned  when  foreigners  desired  to  realize  a  profit ;  and  thus 
the  United  States  would  be  exposed  to  the  vicissitudes  of 
foreign  markets. 


356         Funding  of  the  Indebtedness.       [§  152 

It  was  hoped  that  the  explicit  declarations  in  favor  of  a 
coin  redemption,  as  stated  in  the  declaration  of  March,  1869, 
and  renewed  in  the  funding  act  of  1870,  would  remove  the 
doubts  of  foreigners  so  that  European  capital  would  be 
attracted  in  a  much  larger  volume  for  investment  in  the  new 
securities,  and  thus  secure  absolutely  the  success  of  refunding. 
Possibly  this  might  have  occurred  but  for  untoward  events.  A 
financial  disturbance  was  occasioned  in  Europe  by  the  Franco- 
Prussian  War  of  1 870-187 1,  which  created  an  unexpected 
demand  for  funds  abroad.  In  the  United  States  also  the 
process  of  refunding  was  checked  by  the  panic  of  1873,  and 
under  these  circumstances  no  bonds  were  sold  until  1877 
at  a  lower  interest  than  5   per  cent. 

152.    Sinking  Fund. 

In  the  reduction  of  the  debt  the  machinery  of  a  sinking 
fund  was  once  more  brought  into  play.  The  act  of  February 
25,  1862,  authorizing  the  issue  of  the  first  legal-tender  notes 
and  the  sale  of  five-twenty  bonds,  pledged  that  the  coin  paid 
for  duties  on  imports,  after  satisfying  all  interest  requirements 
of  the  public  debt,  should  be  applied  to  the  annual  purchase 
or  payment  of  1  per  cent,  of  the  entire  debt  of  the  United 
States.  The  interest  on  the  amount  purchased  was  also  to  be 
used  for  the  benefit  of  the  fund  thus  created.  During  the 
war  no  attempt  was  made  to  fulfil  this  pledge,  as  the  govern- 
ment was  continually  borrowing  and  adding  to  its  total  indebt- 
edness ;  and  when  peace  was  restored  the  provision  was  not 
regarded  as  binding ;  McCulloch  in  his  annual  reports  makes 
no  reference  to  it. 

Although  the  form  of  the  promises  was  neglected,  the  spirit 
was  carried  out,  since  McCulloch  followed  Gallatin's  example 
of  an  earlier  day  by  cancelling  indebtedness  outright  from 
whatever  surplus  revenues  were  available.  Secretary  Boutwell, 
with  more  precise  respect,  inaugurated  the  policy  of  annual 
purchase  of  bonds,  entered  in  a  separate  account  as  a  "  sink- 
ing   fund."     The   funding   act  of   1870    no   longer   made   it 


§152]  Sinking  Fund.  357 

necessary  to  keep  the  bonds  purchased  in  a  separate  fund, 
but  directed  that  they  be  cancelled  and  destroyed ;  the  prin- 
ciple of  reduction  by  annual  purchase,  however,  was  left 
untouched.  After  the  panic  of  1873,  with  the  consequent 
lessening  of  government  income,  the  treasury  department  fol- 
lowed a  halting  policy.  Some  of  the  secretaries  were  more 
impressed  than  others  with  the  sacredness  of  providing  annu- 
ally for  the  sinking  fund,  but  found  themselves  hampered 
either  by  deficient  revenues  or  by  the  objections  to  buy- 
ing bonds  at  a  premium.  Bristow  regarded  the  sinking  fund 
as  an  object  second  only  to  the  payment  of  interest  on  the 
public  debt,  and  yet  could  not  execute  this  trust.  Ingenious 
explanations  were  consequently  devised  to  show  that  the  gov- 
ernment was  keeping  faith  when  it  did  not  keep  its  promises  : 
the  law  providing  for  the  sinking  fund  was  not  to  be  taken  too 
literally:  "the  coin  paid  for  duties  on  imported  goods"  was 
not  actually  "  set  apart  as  a  special  fund  "  ;  it  was  rather  a 
pledge  by  Congress  that  it  would  provide  revenues  enough 
not  only  to  pay  the  expenses  of  the  government,  but  also  to 
redeem  1  per  cent,  of  the  debt ;  the  sinking  fund  was  simply 
a  representation  of  the  balance  of  revenues  over  expenditures. 
Secretary  Morrill,  the  successor  of  Bristow,  in  1876  made  an 
elaborate  calculation  to  show  that  if  the  whole  period  be 
taken,  beginning  with  1862  and  ending  in  1876,  the  debt  was 
reduced  $223,144,000  more  than  was  actually  demanded  by 
the  sinking-fund  requirements.  Again  the  necessary  prepara- 
tions in  187 7-1878  for  specie  resumption  through  the  sale  of 
bonds  for  the  purchase  of  gold  checked  a  literal  compliance 
with  the  law.  It  was  manifestly  absurd  for  the  government  to 
sell  bonds  for  gold  and  at  the  same  time  buy  bonds  for  the 
sinking  fund. 

In  the  discussion  of  the  struggling  and  halting  efforts  to 
place  the  finances  of  the  government  upon  a  sound  and  per- 
manent basis  after  the  war  was  over  we  must  not  hold  a 
gloomy  view  of  the  condition  of  the  country.  To  be  sure 
there  were  agencies  adverse  to  national  development,  such  as 


358  Funding  of  the  Indebtedness.       [§'52 

irredeemable  paper  currency,  and  unequal  and  heavy  taxation. 
The  condition  of  the  laboring  class  possibly  was  not  so  good  as 
in  i860,  for  wages  had  not  increased  in  proportion  to  the  cost 
of  living.  The  task  of  industrial  readjustment  imposed  heavy 
strains,  and  in  places  the  pressure  created  suffering;  but  in 
spite  of  these  difficulties  the  material  factors  of  industrial  pros- 
perity remained  sound  and  vigorous,  and  the  country  quickly 
resumed  the  wonderful  march  of  progress  witnessed  in  the 
decade  before  the  war.  Immigration  was  large,  and  there 
was  a  generous  increase  in  the  products  of  industry.  An 
official  report  in  1869  declared  that  within  five  years  more 
cotton  spindles  had  been  put  in  motion,  more  iron  furnaces 
erected,  more  iron  smelted,  more  bars  rolled,  more  steel  made, 
more  coal  and  copper  mined,  more  lumber  sawn  and  hewn, 
more  houses  and  shops  constructed,  more  manufactories  of 
different  kinds  started,  and  more  petroleum  collected,  refined, 
and  exported,  than  during  any  equal  period  in  the  history  of 
the  country,  —  and  that  this  increase  had  been  at  a  more  rapid 
rate  than  the  growth  of  population.  The  natural  resources  of 
the  country  and  opportunities  for  productive  enterprise  made 
it  possible  for  the  country  to  press  forward  by  leaps  which  no 
mistakes  of  taxation,  monetary  issue,  or  treasury  borrowing 
could  withstand. 


CHAPTER  XV. 
GREENBACKS   AND   RESUMPTION. 

153.    References. 

Constitutionality  of  Legal-Tender  Notes:  Opinions  in  8  Wal- 
lace, 603-639  (1869) ;  12  Wallace,  457  (1872)  ;  no  U.  S.,  421  (1884) ;  also 
in  J.  B.  Thayer,  Cases  on  Constitutional  Law,  II,  2222  (1869),  2237  (1872), 
2255  (1884)  ;  also  in  Bankers'  Magazine,  XXIV,  712-737  (1869) ;  XXVI, 
832-895  (1872)  ;  also  J.  J.  Knox,  United  Stales  Notes,  156-166,  193- 
229  (1884);  also  E.  McPherson,  Handbook,  1872,  pp.  53-62  (1872); 
G.  Bancroft,  Plea  for  the  Constitution  (1884);  also  in  Sound  Currency, 
V,  No.  11 ;  S.  F.  Miller,  Lectures  on  the  U.  S.  Constitution,  530;  J.  B. 
Thayer,  in  Harvard  Lata  Review,  I,  79 ;  A.  B.  Hart,  Life  of  Chase, 
3S9-414;  Bolles,  III,  251-262  (references,  p.  257);  E.  J.  James,  Con- 
siderations on  the  Legal  Tender  Decisions,  in  Pub.  Amer.  Econ.  Assn.,  Ill 
(1888),  49-80  (references,  p.  80);  J.  H.  Chamberlain,  Legal  Tender 
Decisions,  in  Amer.  Law  Review,  XVIII,  410;  T.  H.  Talbot,  ditto, 
618;  H.  H.  Neill,  Legal  Tender  Questions,  in  Pol.  Set.  Quar.,  I  (1886), 
250-258;  B.  T.  DeWitt,  Are  Legal- Tender  Notes  ex  post  Facto?  in  Pol. 
Sci.  Quar.,  XV,  105-111 ;  W.  C.  Ford,  Legal  Tender  Decision,  in  Prince- 
ton Review,  Sept.,  1884,  123-132;  J.  K.  Upton,  Money  and  Politics,  157- 
170;  H.  White,  231-234. 

Panic  of  1873:  Messages  and  Papers,  VII,  243-247  (Grant,  1873), 
26S-271  (inflation  veto),  285-287  (1874)  ;  Finance  Report,  1875,  PP-  xi-xxi; 
J.  Sherman,  Recollections,  I,  488-506;  J.  G.  Blaine,  Twenty  Years,  II, 
556-566  ;  E.  McPherson,  Handbook  of  Politics,  1874,  pp.  134-155  ;  Bolles, 
III,  283-290;  H.  White,  Fortnightly  Review,  XXVI,  810;  C.  A.  Conant, 
History  of  Modern  Banking,  509-512;  A.  D.  Noyes,  Thirty  Years  of 
American  Finance,  18-20;  D.  Kinley,  Independent  Treasury  System,  181- 
190  ;  V.  B.  Denslow,  Principles  of  Political  Economy,  390-395  ;  E.  Atkin- 
son, Journal  of  Political  Economy,  I,  117-119  (inflation  veto)  : 

Resumption  of  Specie  Payments  :  Messages  and  Papers,  VII,  348 
(Grant,  1875);  Finance  Report,  1867,  v;  1868,  vii ;  1874,  x-xviii ;  1875, 
xii-xxii ;  1876,  xii-xviii ;  1877,  xi-xvi ;  1878,  viii-xvii ;  1879,  ix-xii ;  1880, 
xii-xv  ;  Specie  Resumption  and  Refunding  of  the  National  Debt,  in  Execu- 
tive Documents,  46th  Cong.,  2nd  Sess.,  XVII  (1879-1880);  Statutes,  XVIII, 
296  ;  XX,  87  ;  or  Dunbar,  214,  217  ;  E.  McPherson,  Handbook  of  Politics, 
1876,  pp.  120-127;  1878,  pp.  143-152  (attempts  to  repeal);  J.  Sherman, 

359 


360         Greenbacks  and  Resumption.       [§  154 

Recollections,  I,  507-549,  565-602;  II,  636-660,686-700;  J.  A.  Garfield, 
Works,  II,  490-527  (attempt  to  repeal),  175-185,  246-274,  609-627  (Jan. 
2,  1879)  J  W.  D.  Foulke,  Life  of  Oliver  P.  Morton,  II,  74-102,  317-338, 
355-363;  Bolles,  III,  282-304;  Report  of  Monetary  Commission  (1898), 
425-436;  A.  D.  Noyes,  Thirty  Years  of  American  Finance,  21-56;  J.  K. 
Upton,  Money  and  Politics,  146-156;  C.  F.  Adams,  Currency  Debate  of 
1873,  in  No.  American  Review,  CXIX,  m-165;  H.  White,  Present 
Phases  of  the  Currency  Question,  in  International  Review,  IV  (1877), 
730;  H.  White,  After  Specie  Resumption,  in  International  Review,  V 
(1878),  833-847. 

Greenback  Party:  E.  McPherson,  Handbook  of  Politics,  1876, 
pp.  224-233;  Atlantic  Monthly,  XLII,  521-530;  E.  N.  Dingley,  Life  of 
Nelson  Dingley,  Jr.  (1902),  134-146,  149-156;  Alexander  Johnson,  in 
Lalor's  Encyclopedia,  II,  418-419;  G.  Walker,  Bankers'  Magazine, 
XXXIII   (1878),  248-252;    C.  J.   Bullock,  Monetary  History,  105-109. 

154.     Volume  of  Treasury  Notes. 

It  is  now  necessary  to  return  to  the  fortunes  of  government 
note  circulation.  The  repeal  of  the  contraction  policy  in 
1868  left  the  volume  of  legal-tender  notes  in  uncertainty. 
The  act  of  June  30,  1864,  declared  that  the  total  amount  of 
United  States  notes  should  never  exceed  $400,000,000  ;  and 
in  1866  a  gradual  reduction  began,  soon  checked  by  the  law 
of  1868.  When  Congress  suspended  further  contraction  the 
amount  stood  at  $356,000,000;  the  $44,000,000  of  balance 
was  generally  regarded,  at  least  by  those  who  looked  forward 
to  an  early  return  of  specie  payments,  as  a  reserve  issue  to 
be  used  only  in  case  of  emergency,  when  revenues  fell  below 
expenditures,  or  possibly  as  a  redemption  fund  for  the  frac- 
tional currency,  which  amounted  to  about  $50,000,000.  In 
October,  187 1,  however,  Secretary  Eoutwell  issued  $1,500,000 
of  these  notes,  and  in  the  next  year  $4,637,000.  This  action, 
though  giving  satisfaction  to  advocates  of  a  larger  supply 
of  currency  and  to  stock-exchange  speculators  who  clearly 
recognized  that  speculation  flourished  best  under  a  regime  of 
a  fluctuating  supply  of  currency,  was  sharply  criticised  both 
by  those  who  believed  that  contraction  was  the  true  road  to 
resumption,  as  well  as  by  those  who  felt  that  changes  in  the 
volume   of  currency  should   not  be   left  to  the  uncontrolled 


§  x54]         Volume  of  Treasury  Notes.  361 

judgment  of  any  one  official.  Although  the  treasury  depart- 
ment made  no  public  explanation  or  defence,  it  was  consid- 
ered expedient  to  retire  the  recent  issues. 

The  subject  did  not  rest,  for  the  panic  of  1873  again  aroused 
a  clamor  for  money.  Secretary  Richardson,  who  succeeded 
Boutwell,  yielded  under  the  plea  of  a  great  emergency,  and 
between  March  7,  1873,  and  January  15,  1874,  issued  $26,000,- 
000,  of  legal  tenders,  above  the  $356,000,000,  making  the 
total  $382,000,000.  These  issues  were  put  into  circulation  by 
the  purchase  of  bonds.  Congress,  either  because  it  thought 
there  was  some  doubt  as  to  the  secretary's  power  and  preferred 
to  assume  responsibility,  or  because  it  wished  to  inflate  the 
currency  beyond  the  limit  reached  by  Secretary  Richardson, 
passed  a  bill  in  April,  1874,  for  the  permanent  increase  of  the 
currency  to  $400,000,000. 

The  significance  of  this  proposition  is  clear :  it  not  only  was 
an  indemnity  act  for  an  emergency  issue,  but  it  practically 
authorized  an  increase  of  currency  in  times  of  peace,  thus 
constituting  a  precedent  for  any  future  Congress  to  enlarge 
the  volume  at  will.  Grant  vetoed  the  bill  in  a  memorable 
message,  April  22,  1874,  which  may  be  regarded  as  the  turn- 
ing point  in  the  agitation  for  an  increased  volume  of  treasury 
legal-tender  notes ;  the  president  declared  that  the  theory  of 
increased  circulation  was  a  departure  from  true  principles  of 
finance,  national  interest,  national  obligation  to  creditors, 
congressional  promises,  party  pledges  on  the  part  of  both 
political  parties,  and  of  his  own  personal  views  and  promises 
made  in  every  annual  message  sent  by  him  to  Congress,  and 
in  each  inaugural  address.  "  I  am  not  a  believer  in  any  arti- 
ficial method  of  making  paper  money  equal  to  coin,  when  the 
coin  is  not  owned  or  held  ready  to  redeem  the  promises  to 
pay,  for  paper  money  is  nothing  more  than  promises  to  pay, 
and  is  valuable  exactly  in  proportion  to  the  amount  of  coin 
that  it  can  be  converted  into." 

Notwithstanding  the  reference  to  his  previous  convictions, 
Grant's  veto  came  as  a  surprise  to  the  public  at  large.     Only 


362  Greenbacks  and  Resumption.       [§  '55 

a  few  months  earlier  he  had  stated  that  in  view  of  the  relative 
contraction  in  currency,  due  to  the  increase  of  manufactures 
and  industries,  he  did  not  believe  that  there  was  too  much 
money  even  for  the  dullest  part  of  the  year.  Under  such  cir- 
cumstances the  party  of  monetary  reform  was  greatly  encour- 
age by  his  later  decisive  utterance.  The  victory,  however, 
was  not  complete,  for  under  cover  of  the  act  of  June  20,  1874, 
affecting  the  distribution  of  national  bank  currency,  a  section 
was  smuggled  in,  declaring  that  the  amount  of  United  States 
notes  outstanding  should  not  exceed  $382,000,000.  This, 
however,  was  soon  followed  by  the  resumption  act  of  January 
14,  1875,  looking  forward  to  a  final  reduction  in  the  volume 
to  $300,000,000. 

155.     Constitutionality  of  Legal-Tender  Notes. 

For  some  time  after  the  issue  of  the  greenbacks  there  was 
uncertainty  as  to  the  legal-tender  attribute  of  the  treasury 
notes,  and  questions  quickly  arose  which  required  settlement 
in  the  State  and  federal  courts.  The  trend  of  the  decisions 
of  the  Supreme  Court  from  the  first  was  toward  a  limitation  of 
the  notes:  in  Lane  County  v.  Oregon  (1868)  it  was  held 
that  the  notes  were  not  legal  tender  for  State  taxes ;  in  The 
Bank  v.  Supervisors  (1868)  that  they  were  obligations  or 
securities,  and  consequently  exempt  from  taxation  ;  and  in 
Bronson  v.  Rodes  (1868)  that  they  were  not  legal  tender  in 
the  settlement  of  contracts  specifically  calling  for  the  payment 
of  specie.  Finally  the  more  direct  question  of  constitution- 
ality was  passed  upon  by  the  Supreme  Court  in  1869  in  the 
case  of  Hepburn  v.  Griswold.  In  i860  a  Mrs.  Hepburn  in  a 
promissory  note  agreed  to  pay  Griswold  on  February  20, 
1862,  $11,250.  At  each  of  the  above  dates  the  only  lawful 
money  was  gold  and  silver  coin.  Mrs.  Hepburn  failed  to  pay 
the  note  at  maturity,  and  upon  a  suit  brought  in  Kentucky, 
March,  1864,  tendered  payment  in  United  States  notes  which 
had  been  issued  February  25,  1862,  that  is,  five  days  after  the 
maturity  of  the  note.     The  tender  was  refused.     An  appeal 


§  155]  Legal-Tender  Notes.  363 

was  carried  to  the  United  States  Supreme  Court,  and  a  deci- 
sion rendered  in  December,  1869.  The  opinion  by  a  fateful 
stroke  of  fortune  was  delivered  by  Chief-Justice  Chase,  in 
whose  administration  as  secretary  of  the  treasury  the  notes  had 
been  first  issued.  The  legal-tender  quality  was  denied ;  yet 
the  whole  question  was  not  covered,  because  the  case  involved 
only  the  tender  of  notes  in  settlement  of  contracts  entered 
on  previous  to  the  first  legal-tender  act ;  and  Chase,  in  the 
declaratory  portions  of  the  opinion,  was  careful  to  limit  the 
application  of  the  decision  to  such  contracts.  Nevertheless 
the  court  clearly  indicated  its  conviction  on  the  question  of 
the  constitutionality  of  notes  tendered  in  the  settlement  of  cur- 
rent contracts,  for  it  practically  asserted  that  the  legal-tender 
clause  was  not  only  improper  but  unnecessary.  "Amid  the 
tumult  of  the  late  Civil  War  —  the  time  was  not  favorable  to 
considerate  reflection  upon  the  constitutional  limits  of  legisla- 
tive or  executive  authority.  If  power  was  assumed  from- 
patriotic  motives,  the  assumption  found  ready  justification  in 
patriotic  hearts.  Many  who  doubted  yielded  their  doubts ; 
many  who  did  not  doubt  were  silent.  Some  who  were  strongly 
averse  to  making  government  notes  a  legal  tender  felt  them- 
selves constrained  to  acquiesce  in  the  views  of  the  advocates 
of  the  measure.  Not  a  few  who  then  insisted  upon  its  neces- 
sity, or  acquiesced  in  that  view,  have,  since  the  return  of 
peace,  and  under  the  influence  of  the  calmer  time,  reconsid- 
ered their  conclusions,  and  now  concur  in  those  which  we 
have  just  announced."  Three  justices  concurred  with  Chase 
in  the  majority  opinion,  while  a  dissenting  opinion  was  ren- 
dered by  Justice  Miller  in  which  two  of  his  associates  joined, 
thus  dividing  the  court,  four  to  three. 

The  decision  was  unpopular.  The  close  division  of  the 
court,  when  it  was  not  complete,  was  an  irritating  factor,  to 
say  nothing  of  the  disturbance  to  business  if  gold  payments 
were  to  be  enforced.  A  second  case,  Knox  v.  Lee,  conse- 
quently came  before  the  court,  but  before  the  decision  was 
rendered  in   May,   1871,  the  membership  of  the  court  was 


364         Greenbacks  and  Resumption.       [§  155 

changed  by  the  addition  of  two  members,  one  to  fill  a 
vacancy,  and  the  other  through  a  statute  enlarging  the  court 
from  seven  to  eight.  Inasmuch  as  on  this  occasion  the  deci- 
sion of  1869  was  reversed,  there  have  been  charges  that  the 
court  was  packed  in  order  to  bring  about  the  reversal.  The 
evidence  on  this  point  has  been  carefully  examined  by  Pro- 
fessor Hart  in  his  biography  of  Chase,  and  the  charges  of 
collusion  clearly  shown  to  be  unfounded.  That  the  new 
justices  would  be  in  general  accord  with  the  administration 
was  to  be  expected ;  there  was,  however,  no  previous  under- 
standing of  their  views  on  the  particular  question  of  legal 
tenders,  and  no  instructions  to  bring  about  a  reversal  of  the 
earlier  decision.  Nevertheless,  it  must  be  admitted  that  there 
was  a  strong  popular  expectation  that  as  soon  as  the  court  was 
reorganized,  a  reversal  of  the  opinion  would  be  made.  This 
is  seen  in  the  fact  that  the  first  decision  did  not  lead  to  a 
reduction  in  the  premium  on  gold ;  and  the  exceptional 
methods  adopted  by  the  court  in  order  to  bring  another  case 
quickly  before  it  for  adjudgment  showed  unusual  feeling  and 
pressure. 

In  the  opinion  on  the  case  of  1871  (filed  in  1872),  the 
court  held  that  a  broad  interpretation  must  be  given  to  the 
Constitution,  for  it  could  not  be  expected  that  this  document 
would  completely  enumerate  all  the  powers  of  government 
with  details  and  specifications ;  the  powers  of  Congress  must 
be  regarded  as  related  to  each  other,  and  means  for  a  common 
end.  Among  the  non-enumerated  powers,  there  certainly 
must  be  included  the  power  of  self-preservation,  and  no 
reasonable  construction  of  the  Constitution  could  deny  to  a 
government  the  right  to  employ  freely  every  means  not  pro- 
hibited, or  necessary  for  its  preservation.  And  in  carrying 
out  its  purpose  Congress  is  entitled  to  a  choice  of  means  which 
are  in  fact  conducive  to  the  exercise  of  a  power  granted  by 
the  Constitution.  Marshall's  words  in  the  decision  McCul- 
loch  v.  Maryland  are  cited  as  convincing  and  conclusive. 
Let  the  end  be  legitimate,  let  it  be  within  the  scope  of  the 


§  1 5 5 J  Legal-Tender  Notes.  365 

Constitution,  and  all  means  which  are  appropriate,  which  are 
plainly  adapted  to  that  end,  which  are  not  prohibited,  but 
are  consistent  with  the  letter  and  spirit  of  the  Constitution,  are 
constitutional. 

There  were  two  main  questions  for  the  court  to  consider : 
Were  the  legal-tender  acts  inappropriate  means  for  the  execu- 
tion of  any  or  all  of  the  powers  of  the  government  ?  and  were 
they  prohibited  by  the  Constitution  ?  As  to  the  first  question 
the  emergency  was  great  when  the  legal-tender  acts  were 
passed  :  the  endurance  of  the  government  had  been  tried  to 
the  utmost.  "  Something  revived  the  drooping  faith  of  the 
people  ;  something  brought  immediately  to  the  government's 
aid  the  resources  of  the  nation,  and  something  enabled  the 
successful  prosecution  of  the  war  and  the  preservation  of  the 
national  life.  What  was  it,  if  not  the  legal-tender  enact- 
ments?" As  to  whether  other  means  might  not  have  been 
effective,  that  was  not  for  the  courts  to  decide ;  the  degree 
of  appropriateness  of  given  laws  is  for  the  legislature  and  not 
for  the  judiciary  to  determine. 

On  the  second  point  the  court  held  that  the  making 
of  the  treasury  notes  a  legal  tender  was  not  forbidden  either 
by  the  letter  or  by  the  spirit  of  the  Constitution.  Although 
certain  express  powers  are  given  to  Congress  in  regard  to 
money,  it  cannot  be  inferred,  as  the  Constitution  has  been 
in  general  construed,  that  all  other  powers  are  by  implication 
forbidden.  Since  the  States  are  expressly  prohibited  from 
declaring  what  shall  be  money,  or  from  regulating  its  value, 
whatever  power  exists  over  the  currency  is  vested  in  Congress. 
Considering  that  there  is  no  express  prohibition  upon  Congress 
in  this  matter,  and  that  paper  money  was  almost  exclusively 
in  use  in  the  States  as  the  medium  of  exchange,  it  must  be 
presumed  that  the  framers  of  the  Constitution  did  realize 
that  emergencies  might  arise  when  the  precious  metals  would 
prove  inadequate  to  the  necessities  of  the  government. 

Nor  could  it  be  argued  that  the  legal-tender  acts  are  uncon- 
stitutional because   they  directly  impaired    the   obligation  of 


366  Greenbacks  and  Resumption.       [§  156 

contracts,  that  is,  of  contracts  made  previous  to  the  passage 
of  the  act.  In  contracts  for  payment  of  money,  it  did  not 
mean  money  at  the  time  when  the  contract  was  made,  nor 
gold  or  silver,  nor  money  of  equal  intrinsic  value  in  the 
market ;  the  obligation  was  to  pay  that  which  is  recognized 
as  money  when  the  payment  is  to  be  made.  "  Every  contract 
for  the  payment  of  money  simply,  is  necessarily  subject  to  the 
constitutional  power  of  the  government  over  the  currency, 
whatever  that  power  may  be,  and  the  obligation  of  the  parties 
is  therefore  assumed  with  reference  to  that  power."  More 
than  this,  Congress  does  have  the  power  to  impair  contracts 
indirectly  by  rendering  them  fruitless  or  partly  fruitless,  as  in 
bankrupt  laws,  declaration  of  war,  and  embargoes.  No  obli- 
gation of  a  contract  can  extend  to  the  defeat  of  legitimate 
government  authority. 

In  conclusion,  it  was  observed  that  the  legal-tender  acts  did 
not  attempt  to  make  paper  a  standard  of  value  :  their  validity 
does  not  rest  upon  the  assertion  that  this  emission  is  coin- 
age, or  any  regulation  of  the  value  of  money ;  or  that  Con- 
gress may  make  money  out  of  anything  which  has  no  value. 
"  What  we  do  assert  is,  that  Congress  has  power  to  enact  that 
the  government's  promises  to  pay  money  shall  be,  for  the  time 
being,  equivalent  in  value  to  the  representation  of  value  deter- 
mined by  the  coinage  acts  or  to  multiples  thereof." 

156.    Issues  in  Times  of  Peace. 

This  decision  settled  the  question  of  constitutionality  of 
legal-tender  issues  in  times  of  war,  but  it  left  uncertainty 
as  to  the  powers  of  government  over  currency  during  peace. 
The  judicial  decision  on  this  point  was  made  by  the  Supreme 
Court  in  1884  in  the  case  of  Juilliardv.  Greenman ;  the  ques- 
tion before  it  was  the  constitutionality  of  that  provision  of 
the  law  of  1878  which  required  that  all  legal-tender  notes 
redeemed  at  the  treasury  be  reissued,  kept  in  circulation, 
and  continue  to  retain  their  legal-tender  quality.  The  court 
decided  in  favor  of  the  constitutionality  of  such  reissues,  by 


§  156]  Issues  in  Times  of  Peace.  367 

a  generous  interpretation  of  the  doctrine  of  implied  powers,  in 
support  of  which  the  reasoning  of  Marshall,  in  the  case 
McCulloch  v.  Maryland,  is  again  reviewed  at  length.  As  pre- 
liminary to  the  main  conclusion,  it  is  shown  that  Congress 
has  the  power  to  pay  the  debts  of  the  United  States ;  that  in 
pursuance  of  this,  all  means  which  are  appropriate,  and  not 
prohibited,  are  constitutional ;  that  not  too  much  weight  should 
be  given  to  the  debates  and  votes  of  the  constitutional  con- 
vention of  1787,  for  there  is  no  proof  of  any  general  con- 
sensus of  opinion  in  the  convention  upon  this  subject ;  that 
the  power  to  borrow  money  includes  the  power  to  issue  obli- 
gations in  any  appropriate  form,  and,  if  desired,  in  a  form 
adapted  to  circulation  from  hand  to  hand  in  the  ordinary 
transactions  of  commerce  and  trade ;  that  the  issue  of  legal- 
tender  notes  is  incident  to  the  right  of  coinage ;  and  finally 
that  Congress  has  power  to  provide  a  currency  for  the  whole 
country.  As  a  consequence,  Congress  "  may  issue  the  obli- 
gations in  such  form  and  impose  upon  them  such  qualities 
as  currency  for  the  purchase  of  merchandise  and  the  payment 
of  debts  as  accord  with  the  usage  of  sovereign  governments  "  ; 
and  it  is  for  Congress,  the  legislature  of  a  sovereign  nation,  to 
declare  whether,  because  of  an  inadequacy  of  the  supply  of 
gold  and  silver  coin,  it  is  wise  to  resort  to  legal-tender  paper 
issues. 

The  decision  reopened  the  controversy;  this  was  largely 
academic  ;  Bancroft  the  historian  made  a  passionate  protest 
in  a  pamphlet  entitled  :  "  A  Plea  for  the  Constitution  of  the 
United  States  of  America,  Wounded  in  the  House  of  its  Guar- 
dians " ;  but  popular  judgment  on  the  whole  was  favorable. 
Lawyers  and  constitutional  commentators  were  slowly  coming 
to  the  conclusion  that  the  interpretation  of  the  Constitution 
must  rest  upon  a  broader  basis  than  that  of  the  debates  of 
1787;  and  the  people  at  large  were  satisfied  that  there  was 
to  be  no  disturbance  in  the  conditions  to  which  they  had  been 
long  accustomed. 


368  Greenbacks  and  Resumption.       [§  157 


157.    Sale  of  Gold. 

Closely  related  to  the  question  of  contraction  was  the  policy 
to  be  followed  in  disposing  of  the  gold  which  flowed  into  the 
treasury  in  the  payment  of  import  duties.  The  treatment  of 
this  surplus  gold  was,  as  previously  described,  a  perplexing 
problem  during  the  latter  years  of  the  war  when  the  amount 
locked  up  in  the  vaults  of  the  United  States  treasury  was  a 
considerable  part  of  all  the  gold  of  the  country,  and  was 
more  than  was  needed  for  payment  of  interest  on  the  public 
debt.  Great  pressure  was  brought  upon  the  treasury  to  part 
with  gold  in  one  way  or  another  to  make  the  coin  available 
for  commerce.  The  treasury  accumulation  of  coin,  together 
with  the  rapid  and  violent  fluctuations  in  the  value  of  gold, 
became  especially  prominent  in  1864.  To  return  gold  into 
general  circulation,  three  ways  were  proposed  :  one  by  antici- 
pating the  payment  of  interest  on  the  debt,  a  second  by  the 
purchase  of  bonds  for  the  sinking  fund,  and  a  third  by  sale  of 
specie.  The  first  was  thought  ineffective,  since  the  procedure 
would  be  too  slow  to  have  any  appreciable  effect  upon  the 
gold  market ;  the  second  was  considered  absurd,  in  view  of  the 
fact  that  the  government  was  then  borrowing  $2,000,000  a  day 
to  meet  current  expenses.  In  March,  1864,  a  joint  resolution 
was  adopted,  involving  the  use  of  all  three  methods,  authoriz- 
ing the  secretary  of  the  treasury  to  anticipate  the  payment  of 
interest  and  to  dispose  of  any  gold  in  the  treasury  not  neces- 
sary for  the  payment  of  interest  on  the  public  debt,  provided 
the  obligation  to  create  the  sinking  fund  be  not  impaired. 

McCulloch  in  his  treasury  policy  regarded  a  steady  market 
in  gold  as  of  more  importance  than  the  saving  of  a  few  millions 
of  dollars  in  interest  through  refunding  measures.  He  main- 
tained that  the  treasury  should  use  its  powers  to  prevent  specu- 
lative combinations  in  gold,  and  thus  promote  the  steadiness 
of  the  money  market,  advance  the  currency  toward  a  true 
standard  of  value,  and  prevent  financial  disturbance.  This 
policy  of  continuous  sale  of  gold  met  a  double  opposition  :  on 


§157]  Sale  of  Gold.  369 

the  one  hand,  from  those  who  believed  that  gold  must  be 
amassed  in  the  treasury  to  effect  a  speedy  resumption  of  specie 
payments ;  on  the  other,  from  those  who  argued  that  an 
advance  in  the  market  price  of  gold  was  desirable  in  order  to 
prevent  bondholders,  especially  foreigners  who  had  purchased 
American  securities  with  paper  money  at  a  great  discount  as 
compared  with  gold,  from  realizing  any  advantage  which  would 
result  by  returning  and  reselling  these  securities  for  money  of 
greater  worth. 

For  several  years  gold  was  sold  by  the  treasury  department 
at  private  sale,  but  in  1868,  the  practice  was  introduced  of 
selling  gold  by  auction  to  the  highest  bidder.  Wall  Street 
promptly  protested,  on  the  ground  that  the  gold  market  was 
put  into  the  control  of  speculators,  to  the  great  disadvantage 
of  commercial  buyers  of  gold  for  legitimate  trade  purposes. 
The  commercial  trading  in  gold  as  a  commodity  naturally  cen- 
tred in  New  York  City,  the  largest  importing  market  in  the 
United  States,  where  the  dealings  were  so  constant  and  enor- 
mous that  the  gold-room,  situated  next  to  the  Stock  Exchange, 
was  a  recognized  institution  in  the  financial  life  of  New  York, 
and  the  quotations  there  established  were  sharply  watched  by 
business  men  throughout  the  country.  As  the  supply  of  gold 
outside  of  the  government  treasury  was  quite  limited,  it  finally 
occurred  to  Jay  Gould  and  James  Fisk,  two  of  the  most 
daring  speculators  developed  by  post-bellum  conditions,  to 
endeavor  to  corner  the  gold  supply.  Their  financial  venture 
came  to  a  crisis  in  September,  1869,  in  the  early  days  of 
Grant's  administration,  when  Boutwell  was  secretary  of  the 
treasury.  Complete  success  could  be  attained  only  by  pre- 
venting any  unusual  sale  of  gold  by  the  treasury  department ; 
hence  for  months,  as  was  afterwards  learned,  those  connected 
with  the  project  found  means  to  impress  upon  the  administra- 
tion the  wisdom  of  keeping  up  the  price  of  gold  during  the 
autumn,  in  order  to  assist  the  West  in  moving  its  crops,  since 
a  high  premium  on  gold  was  supposed  to  make  the  farmers' 
grain  worth  so  much  the  more.     In  a  few  days  the  premium 


370  Greenbacks  and  Resumption.       [§  158 

on  gold  was  run  up  from  130  to  162  ;  at  this  juncture  Secre- 
tary Boutwell  ordered  the  sale  of  gold,  and  the  price  then  fell 
to  135,  but  in  these  few  hours  of  rapid  fluctuations  many  were 
irretrievably  ruined.  In  the  annals  of  Wall  Street  no  day  is 
more  notorious  than  this  Black  Friday,  September  23,  1869, 
and  the  unfortunate  connection  of  the  government  with  the 
affair  helped  to  inflame  the  unreasoning  hostility  of  the  agri- 
cultural districts  in  the  interior  to  all  financial  measures  ema- 
nating from  the  larger  cities  of  the  East. 


158.    Panic  of  1873. 

In  1873  occurred  a  panic  which  affected  every  operation  of 
finance  and  commerce.  It  was  more  than  a  panic  ;  it  was  the 
beginning  of  a  long  period  of  financial  and  industrial  depres- 
sion, in  many  ways  the  logical  outcome  of  ill-adjusted  produc- 
tion and  inflated  credit.  Remarkable  changes  in  industry 
and  commercial  organization  were  coincident  with  an  enor- 
mous expansion  of  railway  construction :  during  the  years 
1 860-1 86  7  the  annual  increase  in  railways  averaged  but  131 1 
miles;  in  1869  it  rose  to  4953;  in  1870,  to  5690;  in  187 1, 
to  7670;  and  in  1872,  to  6167  miles, —  a  total  of  over  25,000 
miles  in  four  years.  The  process  involved  a  sinking  of  capital 
far  beyond  what  was  immediately  productive,  and  the  opening 
of  vast  areas  of  wheat-growing  country,  revolutionized  the  price 
of  grain,  and  disturbed  the  status  of  the  farmer.  The  same 
expansion  took  place  in  Russia  and  South  America ;  and  this 
accession  of  new  sources  of  world  supplies  on  a  large  scale, 
together  with  the  readjustments  in  trade  due  to  the  Suez  Canal, 
gave  to  industrial  development  sudden  twists  and  turnings  quite 
beyond  calculation.  The  rapid  and  unprecedented  construc- 
tion of  railways  in  turn  created  a  demand  for  iron,  which  led 
to  over-investment  in  this  industry.  There  appeared  to  be  no 
end  to  possible  opportunities  and  profits  in  the  industrial  world, 
and  new  securities  were  created  on  a  large  scale,  while  prices 
of  all  commodities  were  unduly  inflated. 


§*S8] 


Panic  of  1873. 


371 


Another  important  factor  in  bringing  economic  organization 
to  a  standstill  was  a  change  in  the  international  trade  relations. 
The  United  States  had  incurred  a  heavy  foreign  indebted- 
ness, having  borrowed  abroad  between  1861  and  1868,  on  her 
national,  state,  railway,  and  other  securities,  an  amount  esti- 
mated at  $1,500,000,000.  In  return  for  this  credit  the  United 
States  incurred  an  annual  interest  charge  estimated  in  1868 
at  $80,000,000 ;  in  addition  payments  made  by  American 
travellers  abroad  and  for  freights  in  foreign  vessels  brought 
the  total  annual  tribute,  in  addition  to  payments  for  ordinary 
imports,  up  to  $129,000,000.  The  natural  resources  for  mak- 
ing this  payment  were  curtailed  by  the  war;  the  export  of 
cotton  practically  ceased  for  several  years ;  after  peace  was 
established,  exports  of  merchandise  increased,  but  not  in  the 
same  proportion  as  the  rise  in  imports.  This  is  seen  in  the 
following  table  prepared  by  Wells  and  Cairnes,  where  a  com- 
parison is  made  of  imports  and  exports  before  the  war  with  the 
five  years  succeeding  :  — 


Imports 
(less  re-exports) 

Domestic  exports 
(including  specie) 

1858 
1859 

:86o 

1868 
1869 

1870 
1871 
1872 

$251,700,000 
317,800,000 
335,200,000 

351,200,000 
412,200,000 
431,900,000 
513,100,000 
617,600,000 

$293,700,000 
335,800,000 
373,100,000 

352,700,000 
318,000,000 
420,500,000 
513,000,000 
501,100,000 

Annual  average  of 
last  s  years 

$465,200,000 

$421,060,000 

For  a  time  the  adverse  balance  was  settled  by  the  transfer 
of  government  bonds  to  foreign  account,  and  these  securities 
were  as  good  as  gold  in  settling  the  international  balance  of 
trade.  An  end  came  to  the  supply  of  bonds  on  terms  which 
would  satisfy  the  foreign  creditors,  and  it  became  necessary  to 
draw  specie  ;  this  disturbed  the  domestic  money  market.    It  is 


372         Greenbacks  and  Resumption.       [§  159 

easy  now  to  diagnose  the  evils  and  dangers,  but  in  1873  there 
was  little  anticipation  of  disaster,  and  consequently  no  proper 
preparation  by  conservative  financial  interests.  When  the 
crisis  came,  the  treasury  was  so  involved  and  so  connected 
with  private  finance,  that  tremendous  pressure  was  brought 
upon  the  government  to  relieve  by  its  fiscal  aid  evils  occasioned 
by  the  bad  judgment  of  the  business  world.  Fortunately  the 
receipts  of  the  treasury  were  so  large  at  this  time  that  even  a 
serious  depression  did  not  greatly  embarrass  the  government 
in  providing  for  current  supplies. 

The  secretary  of  the  treasury  was  easily  prevailed  upon  to 
issue  (March,  1873-January,  1874)  $26,000,000  of  legal-tender 
notes  in  the  purchase  of  bonds  in  order  to  relieve  a  stringent 
money  market;  and  when  Congress  met  in  December,  1873, 
demands  for  government  action  took  every  form  known  to 
finance.  So  great  was  the  impetus  to  the  activity  of  expan- 
sionists and  greenbackers,  that  for  a  brief  period  any  positive 
action  looking  toward  resumption  seemed  indefinitely  post- 
poned. Only  by  the  veto  of  President  Grant,  which  has  been 
referred  to,  was  actual  inflation  checked. 

159.    Resumption  Act  of  1875. 

The  political  consequences  of  the  panic  were  seen  in  the 
autumn  of  1874,  when  the  congressional  elections,  for  the  first 
time  since  i860,  went  against  the  Republican  party.  Under 
the  pressure  of  political  necessity,  inspired  in  part  by  the 
vigorous  tone  of  Grant's  veto  and  by  the  positive  demands  of 
Bristow  who  succeeded  Richardson  as  secretary  of  the  treas- 
ury, a  bill  was  enacted  for  the  resumption  of  specie  payments 
by  the  expiring  Congress,  January  14,  1875,  while  the  Repub- 
licans still  held  power  to  rally  to  its  support  sufficient  votes 
for  its  passage.  The  measure  was  loaded  with  a  variety  of 
provisions  :  ( 1 )  A  system  of  free  banking  which  will  be  dis- 
cussed ;  (2)  the  retirement  of  greenbacks  equal  to  80  per 
cent,  of  the  amount  of  new  national  bank-notes  issued,  until 
the  greenback  circulation  should  be  reduced  to  $300,000,000, 


§  1 59J  Resumption  Act  of  1875.  373 

after  which  no  further  reduction  of  the  greenbacks  was  to 
take  place.  It  was  argued  that  this  check  would  prevent 
either  expansion  or  contraction  of  the  currency,  as  nearly 
20  per  cent,  of  the  notes  were  already  held  as  bank  reserves; 
(3)  the  withdrawal  of  paper  fractional  currency  and  the  sub- 
stitution of  silver  coin  ;  (4)  removal  of  the  charge  for  coinage 
of  gold;  (5)  resumption  of  specie  payments  on  January  1, 
1879  :  f°r  tms  purpose  the  treasury  was  authorized  to  use 
the  surplus  specie  in  the  treasury ;  and,  if  necessary,  to  sell 
bonds,  of  the  classes  authorized  under  the  act  of  July  14, 
1870,  in  order  to  obtain  additional  gold.  The  legal-tender 
quality  of  both  greenbacks  and  national  bank-notes  remained 
unchanged. 

Like  most  compromises,  the  measure  aroused  little  enthu- 
siasm :  as  a  matter  of  fact,  the  premium  on  gold  went  higher 
in  1875  than  m  1^74,  and  in  1876  was  as  high  as  in  1871  or 
1872.  The  act,  save  for  fixing  a  distant  date  for  resumption, 
contained  but  little  definite  provision  for  pressing  the  country 
on  in  its  progress  toward  specie  payments.  It  was  regarded 
by  some  indeed  as  distinctly  an  inflation  measure  :  the  day  of 
resumption  was  so  remote  that  no  inflationist  need  feel  anxiety, 
and  there  was  plenty  of  opportunity  for  more  paper  currency 
under  the  provision  of  free  banking.  The  measure  was  pur- 
posely left  vague,  and  by  command  of  the  party  caucus  there 
was  practically  no  discussion  of  the  bill  in  the  Senate.  If  there 
had  been  strong  conviction  of  the  necessity  of  resumption, 
and  a  serious  desire  to  effect  it,  a  simple  bill  could  have  been 
passed,  authorizing  the  retirement  of  treasury  notes  by  con- 
version into  bonds  ;  but  when  an  attempt  was  made  to  secure 
an  explicit  declaration  that  the  measure  did  not  permit  the 
future  reissue  of  the  legal-tender  notes  which  might  be  returned 
to  the  treasury,  Senator  Sherman  frankly  declared  that  this 
question,  as  well  as  others,  was  not  definitely  settled  in  the  bill, 
and  that  it  was  wiser  to  leave  to  the  future  questions  that 
divide  and  distract,  and  for  the  present  hold  to  the  main  pur- 
pose of  accomplishing  the  great  work  of  resumption. 


374         Greenbacks  and  Resumption.       [§  160 

The  most  serious  practical  defect  in  the  law,  as  afterwards 
stated  by  Sherman  who  finally  had  the  responsibility  of  carry- 
ing the  measure  into  effect,  lay  in  the  withholding  of  power 
from  the  secretary  to  sell  bonds  directly  for  United  States 
notes ;  the  treasury  was  obliged  to  sell  bonds  for  coin,  and  as 
coin  did  not  enter  into  general  circulation,  the  treasury  could 
not  sell  bonds  at  first  hand  to  the  people.  It  was  necessary 
to  carry  on  negotiations  with  the  bankers,  and  this  operation 
gave  rise  to  attacks  upon  the  government  for  entering  into 
dealings  with  syndicates  and  money  brokers.  An  error  of  a 
different  sort  was  to  make  the  retirement  of  United  States 
notes  dependent  upon  the  issue  of  new  bank-notes.  From 
the  standpoint  of  resumption  the  two  processes  had  no  relation 
whatever  to  each  other ;  the  retirement  of  a  part  of  the  gov- 
ernment notes  undoubtedly  advanced  the  residue  toward  par 
in  coin,  but  the  volume  to  be  retired  should  have  been  deter- 
mined by  considerations  independent  of  national  bank  issues. 

160.    Resumption  Accomplished. 

The  act  remained  practically  inoperative  so  far  as  the  prop- 
osition for  immediate  resumption  was  concerned.  Secretary 
Bristow  in  1875-1876  did  not  favor  the  policy  of  accumulating 
gold  in  a  reserve,  as  he  deprecated  the  loss  of  interest  on  the 
specie  so  withdrawn  ;  and  he  feared  the  serious  opposition  of 
the  financial  world,  particularly  of  Germany,  which  was  at 
that  time  abandoning  silver  for  gold  monometallism.  Political 
activity  was  again  aroused  to  prevent  contraction.  The  Dem- 
ocrats in  their  national  platform  of  1876  declared  the  resump- 
tion clause  to  be  "  a  hindrance  to  a  speedy  return  to  specie 
payments,"  and  this  view  was  supported  by  a  considerable 
number  of  Republicans.  The  views  of  the  Greenback  party 
will  receive  separate  consideration. 

When  Hayes  became  president,  March,  1877,  John  Sherman 
of  Ohio  was  appointed  secretary  of  the  treasury.  Sherman 
had  served  continuously  in  Congress  since  1855,  first  as  mem- 
ber of  the  House  until  1861,  and  then  as  senator;  in  1867  he 


§  160]         Resumption  Accomplished.  375 

succeeded  Fessenden  to  the  chairmanship  of  the  committee 
on  finance ;  his  ability  was  unquestioned  ;  he  had  shown  ex- 
ceptional facility  in  handling  financial  details,  understood  the 
money  market  thoroughly,  and  was  a  shrewd  judge  of  men. 
Although  his  record  on  financial  questions  was  marred  by 
inconsistencies,  as,  for  example,  a  change  of  opinion  on  the 
refunding  measures,  he  had  the  confidence  of  eastern  capi- 
talists and  of  those  who  were  working  for  an  early  resumption 
of  specie  payments.  He  had  held  an  important  part  in  fram- 
ing the  resumption  act,  and  immediately  upon  taking  office 
undertook  more  decided  measures  to  carry  it  out.  Sherman 
relied  almost  solely  upon  building  up  a  gold  reserve  through 
the  sale  of  bonds  for  coin.  From  Congress  he  realized  that 
he  would  get  no  added  support ;  rather  there  was  danger  that 
he  would  be  prevented  from  doing  anything  at  all,  for  in  1877 
the  inflationists  were  in  control  of  both  Houses  of  Congress, 
and  again  made  a  determined  effort  to  repeal  the  resumption 
act.  Such  a  measure  was  passed  by  the  House  of  Represen- 
tatives and  failed  in  the  Senate  only  through  disagreement  on 
details.  The  monetary  system  was  also  threatened  with  the 
free  coinage  of  silver.  Surrounded  by  embarrassments  it  was 
inevitable  that  Sherman  should  find  difficulty  in  selling  bonds  : 
European  financiers,  alarmed  by  the  greenback  and  silver 
coinage  agitations,  movements  to  be  subsequently  described, 
expected  American  finances  to  be  deranged,  and  returned  a 
considerable  block  of  bonds  which  competed  with  the  new 
issue.  In  spite  of  all  obstacles,  Sherman  persisted  in  the 
policy  of  gold  accumulation.  He  concluded  that  40  per  cent, 
of  the  notes  was  the  smallest  safe  reserve  of  gold  ;  on  this  basis 
$138,000,000  in  coin  was  necessary.  On  January  1,  1879,  the 
treasury  had  gathered  together  $133,000,000  of  coin  over  and 
above  all  matured  liabilities.  To  do  this  $95,500,000  of  bonds 
were  sold,  the  balance  being  met  from  surplus  revenue.  Slowly 
but  gradually  the  value  of  the  notes  approached  parity  with 
gold,  and  on  December  17,  1878,  a  fortnight  before  the  date 
set,  paper  currency  was  quoted  at  par. 


376  Greenbacks  and  Resumption.       [§  160 

The  following  table  shows  the  average  annual  value  in  gold 
of  $100  in  currency  during  the  entire  period  of  suspension  : 


Fiscal  year 

Value 

Fiscal  year 

Value 

1863 

$72.9 

1 871 

$88.7 

1864 

64.0 

1872 

89.4 

1865 

49  5 

1873 

87-3 

1866 

7i.a 

1874 

89.3 

1867 

70.9 

1875 

88.4 

1868 

7'-5 

1876 

87.8 

1869 

72- 7 

1877 

92.7 

1870 

81. 1 

1878 

975 

In  carrying  through  resumption,  Sherman  showed  firmness 
and  tact.  He  was  careful  not  to  antagonize  too  sharply  the 
elements  of  both  parties  which  favored  silver  coinage ;  though 
he  disliked  the  silver  bill  of  1878,  he  accepted  it  and  declared 
that  it  should  be  given  a  fair  trial.  When  the  bankers  stated 
that  they  would  throw  the  burden  of  the  resumption  of  bank- 
notes, as  well  as  of  United  States  notes,  upon  the  government, 
he  professed  no  concern,  remarking  that  such  action  would  be 
suicide  to  the  banks ;  that  the  government  could  withdraw  all 
of  its  own  deposits  in  banks,  and  present  all  bank-notes  held, 
or  received,  for  instant  redemption.  The  banks,  in  his  opinion, 
would  find  no  profit  in  presenting  treasury  notes  for  coin  in 
order  to  embarrass  the  government ;  legal-tender  notes  were 
used  by  the  banks  for  reserve ;  and  these,  being  interested  in 
keeping  a  strong  reserve  for  which  greenbacks  were  available, 
would  find  it  more  to  their  advantage  to  aid  the  government 
by  making  employment  for  the  treasury  notes. 

To  this  day  there  is  uncertainty  and  division  of  opinion  as 
to  what  were  the  real  forces  that  accomplished  resumption, 
and  the  means  by  which  it  was  afterwards  maintained.  Many 
have  attributed  the  achievement  solely  to  Secretary  Sherman's 
financial  wisdom  and  skill,  and  to  the  fact  that  as  soon  as  it 
was  seen  that  he  was  in  earnest,  public  confidence  co-operated 
to  a  successful  issue.  Without  in  any  way  questioning  Sher- 
man's administrative  ability,  we  must  recognize  as  a  powerful 


§  160]         Resumption  Accomplished.  377 

factor  in  effecting  resumption,  and  in  maintaining  it  during 
the  early  years  of  trial,  the  favorable  commercial  position  of  the 
United  States.  The  tide  of  trade  turned  about  1878,  and  the 
United  States  at  last  was  selling  to  foreign  countries  more  than 
it  was  buying.  Commerce  came  to  the  rescue  of  finance. 
Owing  to  the  fall  in  prices  following  the  depression  of  1873, 
and  the  increasing  demand  of  Europe  for  our  cotton  and 
food,  intensified  in  1879  and  1880  by  the  shortage  in  Eu- 
ropean crops,  our  exports  more  than  doubled  between  1872 
and  1 88 1,  the  increase  from  1877  to  1881  being  over  50  per 
cent.  Such  conditions  were  evidently  favorable  to  the  impor- 
tation and  retention  of  gold ;  and  coupled  with  this  happy 
turn  in  market  conditions,  was  the  fall  of  prices  occasioned  by 
resumption  itself,  which  in  turn  was  a  powerful  magnet  for 
attracting  gold  back  to  this  country. 

In  the  actual  carrying  out  of  resumption,  it  is  to  be  observed 
that  there  was  no  contraction  whatever  in  the  paper  currency  : 
no  destruction  of  treasury  notes  took  place ;  very  little  paper 
money  was  presented  for  gold,  and  whatever  came  in  was  paid 
out  again  by  the  treasury  for  immediate  use.  Under  the 
original  resumption  act  of  1875,  authority  was  given  for  the 
cancellation  of  $82,000,000  legal  tenders  (dependent  upon 
issue  of  new  bank-notes),  which  would  have  reduced  the 
total  volume  to  $300,000,000.  Some  contended  that  under 
the  resumption  act  of  1875  there  could  be  no  reissue  of  the 
greenbacks  when  once  received  into  the  treasury.  The  infla- 
tionist successes  of  1877-1878  settled  this  uncertainty  once 
for  all,  since  Congress,  May  31,  1878,  ordered  that  there  be  no 
further  destruction  of  greenbacks.  The  amount  then  out- 
standing was  $346,681,000,  a  slight  reduction  from  the  $382,- 
000,000  outstanding  in  January,  1875.  As  the  law  has  never 
been  changed,  this  volume  of  legal-tender  circulation  is  still 
current.  It  was  also  enacted  in  1878  that  all  notes  when 
received  into  the  treasury  shall  be  "  reissued  and  paid  out 
again  and  kept  in  circulation,"  and  the  constitutional  doubts 
as  to  the  right  to  do  this  was,  as  has  been  seen,  removed  by 


378  Greenbacks  and  Resumption.       [§  161 

the  Supreme  Court  in  the  decision  of  1884.  The  burden  of 
redemption  in  gold  was  thus  made  perpetual,  although  no 
automatic  process  was  devised  which  would  promise  an  ever- 
ready  stock  of  gold  for  exchange.  Fortunately,  on  account  of 
the  commercial  prosperity  which  was  reflected  in  large  treasury 
surpluses,  the  burden  of  keeping  up  the  gold  reserve  was 
lightly  felt  during  the  next  ten  years.  When,  however,  a  new 
supply  of  treasury  notes  was  added  by  the  act  of  1890,  without 
any  added  provision  for  the  gold  reserve,  and  revenues  showed 
a  deficit  instead  of  a  surplus,  the  weakness  of  the  arrangement 
was  disclosed. 

161.    Greenback  Party. 

The  question  of  legal  tender  should  not  be  dismissed  with- 
out some  further  account  of  the  greenback  philosophy  and  its 
advocacy  by  political  parties.  In  1876  dissatisfaction  with 
the  financial  policy  of  the  government  was  so  bitter  that  it 
crystallized  in  a  separate  political  organization  known  as  the 
Greenback  or  National  party,  and  later  as  the  Greenback 
Labor  party ;  a  consideration  of  the  views  of  this  organization 
throws  light  upon  the  success  of  the  free  silver  agitation.  The 
propositions  advocated  by  the  Greenback  party,  as  we  have  seen, 
were  by  no  means  new  :  inflationists  are  in  evidence  from  the 
beginning  of  financial  reconstruction  ;  at  one  time  or  another, 
when  party  lines  were  not  firmly  drawn  on  financial  questions, 
they  exercised  influence  within  each-  of  the  great  political 
organizations.  Unable,  however,  to  force  these  parties  to 
accept  their  views  without  reservation,  many  voters  in  1876 
abandoned  their  allegiance  in  order  to  form  a  new  organization  ; 
nevertheless,  this  secession  and  party  reconstruction  did  not 
mean  that  each  of  the  older  parties  was  purged  of  the  doc- 
trines of  government  fiat  money  and  payment  of  bondholders 
in  greenbacks.  There  still  remained  such  a  latitude  of  opinion 
that,  on  all  questions  touching  monetary  policy  or  the  treat- 
ment of  public  debt,  Greenbackers  were  likely  to  find  a 
sympathetic  support  among  Republicans  and  Democrats.  It 
was  during  this  period  that  the  term  "  soft  "  currency  was 


§  161]  Greenback  Party.  379 

invented.  The  significance  of  the  term  is  not  very  precise, 
but  it  included  the  doctrines  of  all  then  opposed  to  specie  or 
hard  money  as  the  basis  of  the  monetary  system. 

The  specific  demands  of  the  Greenback  party  in  1876  were 
as  follows  :  (1)  Repeal  of  the  act  for  the  resumption  of  specie 
payments;  (2)  Issue  of  legal-tender  notes  convertible  into 
obligations  bearing  interest  not  exceeding  one  cent  per  day 
on  each  $100;  (3)  Suppression  of  bank-notes;  (4)  No  gold 
bonds  for  sale  in  foreign  markets. 

The  underlying  idea  in  the  greenback  philosophy,  an  idea 
which  still  finds  much  popular  acceptance,  is  that  the  issue  of 
currency  is  a  function  of  the  government,  a  sovereign  right 
which  ought  not  to  be  delegated  to  corporations.  Such  a 
view  appealed  to  the  spirit  of  nationalism  and  democracy, 
and  naturally  and  quickly  led  to  the  full  acceptance  of  the 
principle  of  "  fiat  money."  This  phrase  in  its  extreme  form 
signified  a  money  that  was  not  dependent  for  its  value  on  the 
material  of  which  it  was  made,  that  was  not  redeemable  in  any 
other  money,  and  that  had  its  origin,  force,  sanction,  and  value 
in  the  mandate  of  the  government.  The  value  of  currency 
was  held  to  depend  not  upon  its  convertibility,  but  upon 
its  purchasing  power.  Bonds  were  based  upon  the  credit  of 
the  United  States  and  thus  had  value ;  why  not  follow  the 
same  reasoning  and  policy  as  to  paper  money? 

The  next  step  was  to  deny  that  there  was  any  such  thing  as 
money  of  the  world ;  money  is  national,  not  international ;  it  is 
made  money  by  law,  and  whatever  the  law  makes  money  is 
money.  "  The  only  money  capable  of  perfection  would  be  one 
manufactured  out  of  a  material  costing  substantially  nothing, 
redeemable  in  nothing  else,  inasmuch  as  the  redemption  of 
money  is  its  destruction,  non- exportable,  deriving  its  existence 
from  the  will  of  the  government,  authenticated  by  an  official 
stamp,  and  regulated  as  to  its  value  by  limiting  the  quantity." 

Much  was  made  of  a  non- exportable  currency.  The  dollar, 
it  was  said,  should  have  at  all  times  a  certain  fixed  and  stable 
value  below  which  it  cannot  go ;   it  should  be  issued  by  the 


380         Greenbacks  and  Resumption.       [§  161 

government  alone,  in  the  exercise  of  its  high  prerogative  and 
constitutional  powers;  it  should  be  stamped  on  convenient 
material  of  the  least  possible  intrinsic  value,  so  that  neither 
wear  nor  destruction  will  occasion  any  loss  to  the  government ; 
it  should  be  made  of  such  material  that  it  would  never  be 
exported ;  when  issued,  it  should  never  be  redeemed  j  and  it 
was  solemnly  declared  that  there  was  no  more  reason  why 
the  dollar,  the  unit  of  values,  should.be  redeemed,  than  that  the 
yard-stick,  the  unit  of  length,  should  be  redeemed.  The 
dollar  so  issued  should  possess  a  value,  a  little  greater  than 
that  of  the  gold  dollar,  in  order  that  it  might  be  fundable  into 
a  3.65  per  cent.  bond.  Its  real  value  rested  through  the 
sovereign  act  of  government,  upon  the  wealth,  the  power,  and 
the  prosperity  of  the  country.  The  note  was  a  dollar  and  not 
simply  an  obligation.  It  was  vehemently  denied  that  the 
greenback  was  only  "  a  promise  "  of  the  government  !  Every 
promise  made  by  it  had  been  scrupulously  observed ;  the 
so-called  promise  on  the  United  States  notes  to  pay  dollars 
was  neither  on  demand  nor  at  any  fixed  time.  "  Its  value 
or  purchasing  power  rested  upon  nothing  except  the  laws  of 
Congress  making  it  receivable  for  certain  classes  of  national 
taxes,  and  a  tender  for  private  debts,  and  the  general  consent 
of  the  people."  "  The  degree  of  its  purchasing  value  was 
determined  by  the  quantity  in  circulation.  Opinion  as  to  the 
probability  of  its  redemption  in  coin,  neither  created  its  value, 
nor  fixed  the  magnitude  of  its  value." 

According  to  the  greenbacker  logic,  resumption  in  1879  was 
effected  not  by  the  retirement  of  greenbacks,  or  the  creation 
of  a  gold  reserve  backed  up  by  fortunate  trade  conditions, 
but  by  the  word  of  the  secretary  of  the  treasury  ordering  the 
acceptance  of  greenbacks  at  par  at  the  custom-houses  in  pay- 
ment of  the  duties.  "  At  once  these  greenbacks  were  made 
equal  to  gold.  The  greenback,  meeting  all  the  demands  for 
money  equally  as  well  as  gold,  had  the  same  worth  as  gold, 
and  the  premium  on  gold  at  once  disappeared." 

The  speakers  and  newspapers  in  the  greenback  cause  were 


§  161]  Greenback  Party.  381 

fierce  in  their  denunciation  of  the  so-called  money  interests ;  to 
them  the  American  people  were  opposed,  if  not  enslaved  by  the 
bondholding  interests.  These  interests,  rendered  skilful  and 
wise  by  years  of  dealings  in  the  old  world  and  new,  were 
accused  of  successfully  laboring  for  two  objects  :  the  perpetua- 
tion of  the  bond,  and  the  increase  of  the  value  of  the  currency 
in  which  all  payments  on  interest  or  principal  of  the  bonds 
were  to  be  made.  The  American  people  should  not  be 
"  hewers  of  wood  and  drawers  of  water "  to  foreigners ;  it 
would  gladly  take  at  par  all  bonds  that  the  government  found 
necessary  to  sell,  provided  they  were  payable  at  the  option  of 
the  holder  and  bore  interest  at  3.65  per  cent,  or  lower.  Finally 
the  system  of  funding  was  held  responsible  for  perpetuating  an 
enormous,  non-taxable,  interest-bearing  debt.  It  was  reasoned 
that  the  bonds  support  the  banks,  the  banks  foster  the  public 
debt,  and  the  funding  measures  deprived  the  people  during 
twenty  to  thirty  years,  of  their  lawful  right  to  pay  the  bonds, 
—  a  crime  against  the  laborer  and  tax-payer.  Recent  legisla- 
tion was  cited  in  evidence  :  the  first  step  in  this  campaign  of 
oppression  by  bond -holders,  it  was  said,  was  the  act  of  March 
18,  1869,  which  by  one  stroke  doubled  the  property  of  bond- 
holders by  compelling  the  payment  of  all  bonds  in  coin ;  the 
second  blow  was  struck  in  extending  the  bonds  by  the  refund- 
ing act  of  July  14,  1870;  and  the  plot  was  carried  to  complete 
success  in  the  laws  excluding  silver  from  coinage.  It  was  thus 
reasoned  that  all  of  the  banking,  coinage,  and  bond  legislation 
since  the  Civil  War  had  been  a  part  of  a  well-defined  scheme 
to  defraud  the  public. 

In  1876  the  Greenback  party  polled  less  than  one  hundred 
thousand  votes  (81,740)  ;  in  1878,  at  the  congressional  elec- 
tion, it  secured  the  support  of  more  than  1,000,000  voters;  in 
1880,  308,578;  in  1884,  with  Butler  as  the  presidential  can- 
didate, 175,370.  This  was  the  last  presidential  election  in 
which  the  Greenback  party  figured.  For  a  time  its  financial 
demands  were  enunciated  by  the  Labor  party,  and  later 
were  put  into  the  platform  of  the  Populists  or  People's  party. 


382        Greenbacks  and  Resumption.        [§  161 

Although  the  advocates  of  greenbacks  never  acquired  respon- 
sible party  power,  they  gained  several  decisive  victories  which 
have  left  permanent  results.  Chief  among  these  may  be  men- 
tioned the  stopping  of  contraction  in  1868,  and  in  1878,  the 
repeal  of  the  cancellation  of  notes  which  was  authorized  by 
the  resumption  act. 


CHAPTER  XVI. 

BANKING   AND   TAXATION,  1866-1879. 

162.    References. 

Banking  :  Finance  Report,  1873,  PP-  76-98 ;  1875,  pp.  202-205  (profits), 
223-227  (taxation);  1877,  pp.  168-176  (taxation);  1878,  pp.  156-166; 
1879,  pp.  123-125  (profits),  144-150  (taxation  of  bonds);  1881,  p.  188 
(profits);  Bolles,  III,  341-365;  J-  A.  Garfield,  Works,  I,  543-571  (June  7> 
1870),  571-593  (June  15  and  29,  1870) ;  C.  A.  Conant,  History  of  Modern 
Banking,  265-270;  Report  of  Monetary  Commission  (1898),  pp.  200-218; 
C.  F.  Dunbar,  Theory  and  History  of  Banking,  141-143;  J.  J.  Knox,  His- 
tory of  Banking,  101-151  ;  C    F.  Dunbar,  Economic  Essays,  346-364. 

Taxation:  Finance  Report,  187 1,  p.  viii ;  1874,  pp.  xxiii-xxvii  (cus- 
toms); 1875,  PP-  xxxiv-xxxvii ;  154-159  (whiskey  frauds) ;  1877,  p.  I2° 
(frauds);  1878,  pp.  61-64  (tax  on  tobacco);  Report  of  U.  S.  Revenue 
Commission,  1865-1866  (Pub.  Doc.  1866,  p.  483);  Bolles,  III,  398-444 
(internal  revenue),  445-488  (tariff);  J.  A.  Garfield,  Works,  I,  205-216 
(tariff  bill  of  1866),  383-390  (Jan.  19,  1869),  520-543  (tariff  bill  of  1870); 

II,  551-571  (1878),  637-655  (1879);  F.  H.  Hurd,  in  American  Orations, 

III,  374-405  (Feb.  18,  1881);  W.  McKinley,  Speeches  and  Addresses  (ed. 
1894);  1-22  (Apr.  15,  1878);  W.  D.  Kelley,  Speeches,  9-84  (Jan.  31, 
1866),  322-391  (June  1,  1868);  J.  Sherman,  Speeches,  121-137  (Jan.  23, 
1867),  284-306  (May  23,  1870),  336-355  (March  15,  1872);  E.  Young, 
Customs  Tariff  Legislation,  cxlii-clxxviii ;  F.  A.  Walker,  Discussions  in 
Economics  and  Statistics,  I,  27-68  (1870) ;  F.  W.  Taussig,  History  of  the 
Tariff,  171-229  (references  in  foot-notes) ;  F  C.  Howe,  Taxation  Under 
Internal  Revenue  System,  197-204,  214-222;  D.  A.  Wells,  Practical  Eco- 
nomics, 152-234  (distilled  spirits;  industrial  effects  and  frauds). 

163.     Bank-Note  Circulation. 

The  two  preceding  chapters  have  been  devoted  almost 
exclusively  to  questions  relating  to  the  debt,  the  struggle  over 
issues  of  government  paper  money,  and  the  resumption  of 
specie  payments ;  there  are  three  other  subjects  which  require 
special  consideration  to  bring  the  narrative  during  the  period 
of  readjustment,  1 865-1 879,  into  an  orderly  presentation: 
these  are  the  development  of  the  national  banking  system,  the 
reduction  of  taxation,  and  silver  coinage.  If  it  be  objected  that 
precedence  should  be  given  to  the  subject  of  taxation,  the  an- 

383 


3«4 


Banking  and  Taxation. 


[§  163 


swer  is  that  while  revenue  is  at  the  basis  of  national  vitality,  its 
treatment  during  these  years  received  the  barest  consideration. 

When  the  war  closed  the  bank-note  circulation  was  about 
evenly  divided  between  State  and  national  bank  bills.  The 
application  in  1866  of  the  10  per  cent,  tax  upon  all  local 
issues  finally  drove  such  institutions  as  wished  to  enjoy  note 
circulation  to  reorganize  under  federal  charters ;  and  from  this 
date  controversies  over  banking  were  added  to  the  other  per- 
plexities of  Congress.  Such  subjects  as  the  redemption  of 
notes  and  the  proper  adjustment  of  bank  reserves  to  deposits, 
do  not  properly  concern  national  finance ;  but  some  other 
phases  of  the  banking  problem  are  of  interest  to  the  govern- 
ment in  its  fiscal  capacity ;  among  these  may  be  mentioned 
the  growth  of  bank-note  circulation  as  related  to  the  whole 
question  of  currency,  the  amount  of  United  States  bonds  held 
by  banks,  the  distribution  of  the  circulation,  the  deposit  of 
public  moneys  in  national  banks,  the  power  of  federal  super- 
vision over  bank  issues,  and  the  taxation  of  banks.  In  treating 
these  subjects  it  is  impossible  to  avoid  an  occasional  reference 
to  monetary  controversies  which  have  been  previously  discussed. 

Between  1864  and  1879  trie  number  of  banks,  their  capital, 
circulation,  and  bonds  held  to  secure  circulation,  were  as 
follows,  in  milions  of  dollars  :  — 


Bonds  held  to 

No.  of  banks 

Capital 

Circulation 

secure 
circulation 

1864 

508 

$86.8 

$45-3 

1865 

'5«3 

393-2 

«7'-3 

1866 

1644 

4'5-5 

280.3 

$33'-8 

1867 

1641 

420.1 

293-9 

338.6 

1868 

1643 

420.6 

295.8 

340.5 

1869 

1617 

426.4 

293.6 

339»5 

1870 

1615 

430.4 

291.8 

340.9 

1871 

1767 

458.3 

315-5 

364.5 

1872 

1919 

479.6 

333-5 

382.0 

1873 

1976 

491. 1 

339- » 

388.3 

1874 

2004 

493-8 

333-2 

383-3 

'875 

2088 

504.8 

318.4 

370.3 

1876 

2089 

499-8 

291. s 

337-2 

1877 

2080 

479-5 

291.9 

336.8 

1878 

2053 

466.1 

301.9 

347-6 

1879 

2048 

454  ' 

313.8 

357-3 

§  163]  Bank-Note  Circulation.  385 

In  1866  the  national  bank  circulation  was  $280,000,000, 
well  within  the  limit  of  the  $300,000,000  which  had  been  set  in 
the  original  bank  act.  The  law  intended  that  one-half  of  the 
circulation  should  be  apportioned  among  the  different  States 
according  to  population ;  but  in  the  earlier  acts  formulating 
the  system,  there  were  certain  changes  and  contradictions,  so 
that  when  this  principle  of  apportionment  was  applied,  it  was 
found  that  banks  in  the  older  sections  of  the  country,  par- 
ticularly in  New  England,  had  gained  more  than  their  share  of 
notes.  For  example,  in  1869,  Massachusetts  held  more  than 
one-sixth  of  the  circulation,  and  that  State,  with  her  neighbors, 
Rhode  Island,  Connecticut,  and  New  York,  enjoyed  more  than 
one-half  of  the  entire  amount.  This  was  regarded  as  unfair  to 
the  West  and  the  South.  The  deficiency  of  bank-note  circu- 
lation was  especially  marked  in  the  South  which  naturally  had 
been  in  no  position  to  avail  itself  of  the  privileges  offered  by 
the  banking  act  in  the  early  days  of  its  development.  Wisdom, 
if  not  justice,  demanded  that  a  fresh  opportunity  be  given  this 
section,  since  it  was  good  national  policy  that  the  South  be 
rapidly  reunited  to  the  North  in  a  common  industrial  prosper- 
ity and  in  reciprocal  financial  interests.  Some  went  so  far  as 
to  urge  that  if  there  were  to  be  inequalities,  the  population  of 
the  Western  States  should  have  more  circulation  per  capita  than 
that  of  the  Eastern  States ;  the  latter  with  its  dense  population 
could  easily  use  checks  and  drafts,  but  in  the  West  the  laborers 
and  mechanics  were  forced  to  carry  currency  in  their  pockets. 

A  readjustment  of  bank-note  circulation  was  generally  favored, 
but  it  was  difficult  to  accomplish  :  either  to  increase  above  the 
$300,000,000  limit,  or  to  secure  equalization  by  withdrawal  of 
circulation  from  banks  which  had  more  than  their  share, 
had  its  embarrassments.  It  was  impracticable,  within  a  short 
time  to  withdraw  circulation  which  had  been  assigned ; 
there  was  moreover  objection  to  an  increase  in  the  total 
volume,  both  from  inflationists  who  believed  that  the  expan- 
sion of  banking  currency  would  destroy  any  excuse  for  further 
issues  of  government  legal-tenders,  and  from  contractionists, 

25 


386 


Banking  and  Taxation, 


[§'63 


who  were  convinced  that  expansion  of  paper  currency  of  any 
sort,  whether  banking  or  government,  tended  to  put  off  the 
day  of  specie  payments. 

The  question  was  temporarily  adjusted  by  the  funding  act  of 
July  12,  1870;  among  its  provisions  was  authority  for  an  in- 
crease of  $54,000,000  in  bank-note  circulation  (making  a  total 
of  $354,000,000)  to  go  to  those  sections  where  there  was  a 
deficiency,  to  be  followed  when  this  amount  had  been  taken 
out,  by  the  withdrawal  of  $25,000,000  from  those  States  having 
an  excess,  and  the  assignment  of  this  to  States  having  less 
than  their  proportion.  The  support  of  the  anti- inflationists 
was  secured  by  the  retirement  of  an  equal  amount  of  the 
three  per  cent,  certificates,  which  were  in  use  for  bank 
reserves  and  clearing-house  exchanges.  This  made  but  little 
change  in  the  total  volume  of  notes,  and  the  method  of  re- 
apportionment was  so  clumsy  that  distribution  was  not  modi- 
fied. Opportunity  to  take  out  new  circulation  was  but  tardily 
taken  advantage  of,  —  between  the  passage  of  the  act  and 
Nov.  1,  1871,  there  was  issued  $24,773,000;  in  1872, 
$16,220,000;  and  in  1873,  $7>35  7>°°°-  ^ne  South  and 
West  slightly  increased  their  circulation,  but  showed  no  great 
eagerness,  for  the  high  rate  of  commercial  interest  which  pre- 
vailed in  these  sections  did  not  stimulate  investment  in  bonds 
for  the  purpose  of  circulation.  In  1874  the  excess  and  defi- 
ciency of  circulation,  upon  the  basis  of  the  law  of  1870,  for 
different  sections  was  as  follows :  — 


Excess 

Deficiency 

Southern  and  Southwestern 
Pacific  States  and  Territories 

$60,005,000 
7,861,000 

$52,354,000 

21,033,000 

7,587,000 

The  total  circulation  in  1874  was  but  $333,000,000,  leaving 
a  margin  which  could  have  been  apportioned,  if  desired,  to 
States  having  a  deficiency.     So  sluggish  were  the  South  and 


§  164]  Relations  of  Banks  to  Government.  387 

West  that  there  was  justification  in  the  charge  made  by  the 
anti-inflationists  that  the  clamor  for  more  currency  was  insin- 
cere. Grant,  in  the  veto  message  of  1874,  admitted  that  at 
first  he  was  disposed  to  give  great  weight  to  the  argument  of 
unequal  distribution  of  banking  capital  in  the  country,  but 
when  he  reflected  that  there  was  a  considerable  amount  of 
circulation  authorized  by  existing  law  which  had  not  been 
taken  out,  he  did  not  believe  that  it  was  yet  time  to  consider 
the  question  of  "  more  currency."  As  the  full  amount  of 
circulation  permitted  by  the  law  of  1870  was  not  taken  out, 
it  was  unnecessary  to  withdraw  notes  from  banks  having  an 
excess.  All  questions  of  volume,  equalization,  or  distribution, 
however,  were  set  aside  by  the  resumption  act  of  1875, 
which  provided  for  the  issue  of  bank-notes  to  any  amount, 
subject  to  the  general  provision  of  the  banking  act  as  to 
purchase  and  deposit  of  bonds. 

164.  Relations  of  the  Banks  to  the  Government. 

Under  the  permissive  authority  given  by  the  national  bank- 
ing act  to  the  secretary  of  the  treasury  to  use  national  banks 
as  depositories  of  public  money,  except  receipts  from  customs, 
these  institutions  performed  a  useful  service.  During  the  fif- 
teen years,  1863- 187 8,  tne  receipts  of  public  money  by  the 
depository  banks  were  over  $220,000,000  annually;  at  the  end 
of  this  time  only  $255,000  stood  on  the  books  of  the  depart- 
ment as  unavailable  on  account  of  failure  of  any  of  the  banks, 
and  for  a  portion  of  this  sum  the  treasury  had  security. 
Upon  all  balances  deposited  to  the  credit  of  public  disbursing 
officers  the  banks  paid  a  duty  of  one-half  of  one  per  cent. 
Between  1864  and  1878  the  balance  of  the  treasury  with 
banks  on  June  30  each  year  was  as  follows  : 


1864 

$39,977.°°° 

1872 

$7,778,000 

1865 

36,066,000 

•873 

62,185,000 

1866 

34,298,000 

1874 

7,790,000 

1867 

26,183,000 

1875 

11,914,000 

1868 

23,302,000 

1876 

7,871,000 

1869 

8,875,000 

1877 

7,556,000 

1870 

8,484,000 

1878 

6,938,000 

.871 

7,197,000 

1879 

7,183,000 

388  Banking  and  Taxation.  [§  164 

Any  doubts  which  existed  as  to  the  constitutional  powers  of 
the  federal  government  to  supervise  banking  issues  were  settled 
in  1869  by  the  Supreme  Court  in  the  case  of  Veazie  Bank  v. 
Fenno.  The  taxation  of  State  bank-notes  was  held  constitu- 
tional, not  merely  because  it  was  an  instrument  for  suppressing 
a  circulation  which  came  into  competition  with  notes  issued 
by  the  government,  but  because  it  was  a  right  of  Congress  to 
provide  a  currency  for  the  whole  country,  either  in  coin,  treas- 
ury notes,  or  national  bank-notes.  There  was  no  question  of 
the  power  of  the  government  to  emit  bills  of  credit,  to  make 
them  receivable  in  payment  of  debts  to  itself,  and  to  make 
this  currency  uniform  in  value  and  description,  as  well  as 
convenient  and  useful  for  circulation;  as  an  instrument  to 
this  end,  the  court  upheld  the  power  of  Congress  to  tax  other 
issues.  This  right  had  been  previously  denied  by  many 
Democrats,  especially  by  those  who  held  to  the  stricter  inter- 
pretation of  the  Constitution,  and  adhered  to  limited  powers 
of  the  federal  government.  On  the  other  hand,  so  great  a 
Democratic  authority  as  Gallatin  had  earlier,  in  his  "  Con- 
siderations on  the  Currency,"  written  in  183 1,  anticipated  the 
position  of  the  court  in  observing  that  Congress  had  power 
to  lay  stamp  duties  on  notes,  and  had  exclusive  control  over 
the  monetary  system. 

National  banks  during  this  period  were  subject  to  three 
federal  taxes  :  one  per  cent,  upon  the  average  amounts  of  circu- 
latory notes  outstanding ;  one-half  of  one  per  cent,  upon  the 
average  amount  of  deposits ;  and  one-half  of  one  per  cent, 
upon  the  average  amount  of  capital  stock  not  invested  in 
United  States  bonds.  In  addition  to  these  taxes  banks  in 
many  States  were  subject  to  State  taxation  which  frequently 
made  the  total  burden  quite  heavy;  for  example,  in  1874  the 
national  banks  with  a  capitalization  of  §494, 000,000,  paid  in 
United  States  taxes  $7,256,000  and  in  State  taxes  $9,620,000, 
making  a  total  of  $16,876,000  or  3^  per  cent,  on  the  cap- 
ital. The  federal  taxes  yielded  the  following  sums  in  millions 
of  dollars  :  — 


§  165]     Antagonism  to  Banking  System.      389 


Circulation 

Deposits 

Capital 

Total 

i86S 

#0.7 

|i.i 

{0.1 

$2.0 

1866 

2.1 

2.6 

0.4 

5-i 

1867 

2.9 

2-7 

0.3 

5-8 

1868 

2.9 

2.6 

o-3 

58 

1869 

3-o 

2.6 

°-3 

5-9 

1870 

2.9 

2.6 

0.4 

59 

1871 

3-o 

2.8 

0.4 

6.3 

1872 

3-1 

3-i 

0.4 

6.7 

1873 

3-4 

3-2 

0.5 

7.0 

1874 

3-4 

3-2 

0.5 

7-i 

1875 

3-3 

35 

°-S 

7-3 

1876 

3-' 

35 

0.6 

7.a 

1877 

2.9 

3-4 

0.7 

7.0 

1878 

2.9 

3-3 

0.6 

6.8 

1879 

3-o 

3-3 

0.4 

6.7 

165.  Antagonism  to  the  National  Banking  System. 

With  this  brief  outline  of  the  principal  facts  concerning 
the  growth  of  national  banking,  it  is  possible  now  to  consider 
the  long  and  bitter  controversy  over  the  very  existence  of  the 
system  which  was  intimately  connected  with  the  whole  question 
of  sound  government  finance.  The  reluctance  to  reduce  the 
volume  of  government  treasury  notes  has  already  been  de- 
scribed ;  in  dealing  with  the  issues  of  national  banks,  con- 
gressional policy  was  still  more  inconsistent :  there  was  both 
distrust  and  caprice,  and  there  can  be  no  understanding  of 
banking  legislation  or  even  of  fiscal  policy  during  the  next 
quarter  of  a  century  without  a  keen  appreciation  of  this  sus 
picion  and  even  the  hatred  which  existed  in  some  sections. 

The  indictment  was  something  like  this  :  under  the  national 
banking  system,  a  few  men  in  every  town  or  city  had  been 
able  to  build  up  handsome  fortunes ;  if  the  banking  system 
were  to  continue  under  national  control,  it  must  be  made  more 
free  ;  otherwise  abolish  all  bank  paper  and  substitute  United 
States  currency,  —  the  people's  money.  Government  money 
was  superior  to  that  of  banks ;  treasury  notes  shared  in  the 
triumphs  of  victory ;  it  was  the  fashion  to  glorify  the  "  battle- 
scarred  "  and  "blood-stained"  greenbacks;  why  not  rely 
upon  them  rather  than  upon  the  credit  of  private  institutions. 
The  banking  system  was  accused  of  costing  the  nation  too 


390  Banking  and  Taxation.  [§  165 

much,  and  of  being  dangerous  to  the  liberties  of  the  people ; 
it  controlled  elections,  and  sent  its  stockholders  to  Congresa. 
As  the  future  of  national  banks  depended  upon  public  in- 
debtedness, its  interests  and  the  nation's  interests  clashed. 
Again,  as  the  people  knew  that  the  ultimate  redemption  of 
bank-notes  was  secured  by  the  deposit  of  government  securi- 
ties, and  by  the  maintenance  of  a  reserve  for  which  greenbacks 
were  available,  they  would  unquestionably  prefer  that  which 
secures  to  that  which  requires  to  be  secured  ;  the  substance 
was  more  solid  than  the  shadow.  The  redundancy  of  cur- 
rency was  attributed,  not  to  greenbacks,  but  to  the  prevailing 
and  traditional  vice  in  the  banking  system  of  piling  up  credits 
on  credits  by  banking  on  deposits.  Inasmuch  as  banks  could 
influence  the  volume  of  money,  it  was  regarded  as  a  grave 
wrong  for  the  government  to  delegate  to  this  subordinate  and 
irresponsible  agency  an  absolute  dominion  over  industry  and 
commerce,  and  over  prices  and  wages,  by  inflating  or  contract- 
ing the  currency.  Opinions  of  this  sort  were  too  frequently 
associated  with  a  rapidly  developing  distrust  of  the  money 
interests  of  the  city  by  the  country  region  ;  and  distrust  of 
the  richer  plenty  of  the  East  by  the  West  with  its  scattered 
population  and  small  supply  of  capital. 

The  argument  against  the  banks  which  had  the  most  in- 
fluence was  that  of  excessive  profits  :  it  was  insisted  that  the 
banks  received  a  "  double  profit,"  in  interest  on  the  bonds 
deposited,  and  in  interest  on  the  loan  of  notes  which  the 
banks  received  for  the  bonds.  Again  and  again  it  was  proved 
that  the  profit  was  not  so  much  as  critics  asserted,  since 
the  banks  were  burdened  by  State  taxes,  by  the  several  fed- 
eral taxes  upon  circulation,  capital,  and  deposits,  and  by 
restrictions  as  to  the  maintenance  of  reserve  and  redemption 
funds.  It  was  also  shown  that  although  banking  circulation 
was  generally  if  not  eagerly  taken  up  after  the  passage  of  the 
act  of  1865,  many  banks  limited  their  investment  in  bonds  to 
one-third  of  their  capital,  the  minimum  allowed  by  law,  and 
some  even  neglected  to  call  for  the  notes  attaching  to  the 


§  166]  Internal  Revenue  System.  391 

minimum  deposit.  Again,  after  bonds  went  to  a  premium, 
their  purchase  for  deposit  as  security  enforced  a  new  burden 
and  risk  on  the  banks.  Another  point  of  attack  was  the  gov- 
ernment deposits  in  banks.  Even  conservative^  writers,  like 
Professor  Bowen  of  Harvard,  assailed  the  policy  because  it 
gave  to  the  secretary  of  the  treasury  independent  authority  to 
make  his  own  selection  of  depositories,  and  thus  revived  the 
worst  features  of  the  exploded  pet  banks. 

The  popular  opposition  to  the  expansion  of  the  national 
banking  system  was  reinforced  by  the  jealousy  which  prevailed 
in  certain  administrative  bureaus  of  the  treasury  department. 
John  Jay  Knox,  comptroller  of  the  currency,  in  commenting 
upon  the  restrictions  placed  upon  the  free  development  of  the 
banking  system  by  the  act  of  June  20,  1874,  observes  that 
certain  officials  in  the  treasury  department  were  in  favor  of 
perpetuating  the  legal-tender  notes.  After  noting  that  the 
tendency  of  all  government  bureaus  is  to  magnify  their  own 
importance,  he  writes  that  "the  position  of  the  National 
Banking  Bureau  in  the  treasury  department  was  at  the  com- 
mencement very  strong.  With  Secretaries  Chase,  Fessenden, 
and  McCulloch  the  legal-tender  note  was  but  a  temporary 
expedient,  while  the  national  bank  currency  was  to  be  the  per- 
manent money  of  the  country.  With  Boutwell  and  Richard- 
son the  importance  of  the  legal-tender  note  as  a  financial  factor 
in  increasing  the  power  of  the  secretary  began  to  gain  on  the 
national  bank-note.  This  tendency  began  to  be  felt  in  the 
subordinate  offices.  ...  In  fact,  there  were  from  a  very  early 
day  two  factions  in  the  treasury  department,  the  legal-tender 
faction  and  the  national  bank  faction.  The  former,  whenever 
they  had  the  opportunity,  did  what  they  could  to  prevent  the 
retirement  of  legal-tender  notes  and  the  substitution  therefor 
of  national  bank  currency." 

166.    Revision  of  Internal  Revenue  System. 

The  tax  legislation  of  the  war  period  proved  enormously 
productive,  but  it  also  revealed  many  incongruous  and  con- 


392  Banking  and  Taxation.  [§  166 

tradictory  provisions  which  needed  remedy  as  soon  as  possible. 
During  the  war,  tariff  questions  were  subordinated  to  those  of 
revenue,  and  in  the  first  years  of  peace  there  was  no  sharp 
line  of  party  loyalty  drawn  upon  that  question,  and  a  variety 
of  views  was  tolerated  within  the  party;  not  until  1880  was 
the  tariff  made  a  supreme  party  issue.  Congress  in  1865 
recognized  the  difficulty  of  tax  revision  amid  the  pressure 
of  other  measures  connected  with  reconstruction,  and  dele- 
gated the  preparatory  work  of  inquiry  to  a  commission  com- 
posed of  David  A.  Wells,  Stephen  Colwell,  and  S.  S.  Hayes. 
The  reports  of  this  commission  are  of  high  value  in  throwing 
light  not  only  upon  questions  connected  with  the  incidence  of 
taxation,  but  also  upon  the  condition  of  trade  and  industry  at 
the  close  of  the  war.  In  presenting  its  first  report,  in  Janu- 
ary, 1866,  the  commission  commented  on  the  difficulty  of 
making  a  satisfactory  inquiry  because  statistical  data  were 
lacking  or  imperfect.  Budget  estimates  were  unreliable,  in 
the  face  of  unexpected  events  of  war,  frequent  alterations  in 
the  tariff,  and  defects  in  the  internal  revenue  system.  When 
advances  in  rates  were  made,  the  increase  was  anticipated  by 
importers,  manufacturers,  and  dealers,  and  it  was  therefore 
hard  to  test  the  capacity  of  any  tax  as  a  source  of  revenue. 
For  example,  at  least  a  year's  supply  of  distilled  spirits  was 
manufactured  and  stored  away  before  the  operation  of  the  tax 
of  July  1,  1864;  and  about  two  years'  supply  of  spices  was 
imported  before  the  increased  duties  on  that  commodity  went 
into  effect.  The  difficulty  of  estimating  revenue  in  advance 
was  also  aggravated  by  the  inflated  and  fluctuating  values  of 
all  commodities,  occasioned  by  the  rapidly  increasing  volume 
of  paper  money. 

The  commission  condemned  the  existing  system  of  internal 
revenue,  particularly  on  the  ground  of  its  diffuseness  ;  frequent 
duplication  of  taxes  caused  undue  enhancement  of  prices, 
which,  in  turn,  tended  to  decrease  exports  and  consumption, 
and  thus  to  threaten  the  existence  of  many  branches  of  industry. 
Commodities  were   taxed   not  only  during  manufacture,  but 


§  166]  Internal  Revenue  System.  393 

also  upon  sale,  so  that  from  8  to  20  per  cent,  of  the  value  of 
nearly  every  finished  industrial  product  went  into  the  treasury. 
On  cotton  fabrics,  the  tax  ranged  from  9  to  14  cents  a  pound ; 
while  on  fine  sugars  it  was  equal  to  all  the  value  created  by 
the  labor  employed.  For  the  mechanical  production  of  a 
book,  twelve  to  fifteen  separate  taxes  were  levied  :  upon  each 
constituent  part  of  the  book,  as  paper,  cloth,  leather,  boards, 
thread,  glue,  gold-leaf,  and  type  material,  amounting  in  each 
case  to  from  3  to  5  per  cent.,  while  the  finished  article  paid 
its  tax  of  5  per  cent.  In  some  cases  the  tax  was  altogether 
too  high  to  secure  the  maximum  of  revenue ;  distilled  spirits, 
for  example,  were  taxed  in  1865,  $2.00  as  compared  with  20 
cents  a  gallon  in  1863.  The  stimulus  thus  given  to  fraud  was 
seen  when  the  tax  was  reduced,  July  20,  1868,  from  $2.00  to 
50  cents;  the  revenue  leaped  from  $18,655,000  in  1868  to 
over  $55,000,000  in  1870.  Another  serious  defect  was  the 
lack  of  equalization  and  adjustment  between  the  tariff  and 
the  excise ;  on  some  commodities  the  burden  placed  upon 
domestic  manufactures  was  heavier  than  that  from  import 
duties,  a  condition  which,  if  prolonged,  would  necessarily 
destroy  the  home  industry. 

In  general,  the  commission  proposed  the  speedy  reduction 
or  abolition  of  taxes  which  tended  to  check  development,  the 
retention  of  all  those  which,  like  the  income  tax,  fell  chiefly 
upon  realized  wealth,  and  the  concentration  of  duties  upon  a 
few  commodities.  The  advantage  of  freedom  in  trade  was 
dwelt  upon  :  "  Freedom  from  multitudinous  taxes,  espionage, 
and  vexations ;  freedom  from  needless  official  impositions  and 
intrusions ;  freedom  from  the  hourly  provocations  of  each 
individual  in  the  nation  to  concealments,  evasion,  and  false- 
hoods." The  recommendations  of  the  commission  were  only 
in  part  respected.  While  there  was  a  general  willingness  to 
abolish  the  internal  revenue  duties,  every  attempt  at  radical 
lowering  of  the  tariff  duties  met  a  successful  protest.  Many 
protectionists  easily  arrived  at  the  conviction  that  war  rates 
on  imports  made  a  good  permanent  peace  policy. 


394  Banking  and  Taxation.  [§  166 

The  sequence  of  the  most  important  internal  revenue  acts 
was  as  follows  :  the  act  of  July  13,  1866,  repealed  the  tax  on 
coal  and  pig  iron,  and  lowered  the  duties  on  manufactures, 
products,  and  gross  receipts  of  corporations,  etc.,  taking  off  at 
one  blow  $45,000,000.  The  act  of  March  2,  1867,  reduced 
the  rate  on  cotton,  and  repealed  duties  on  a  considerable 
number  of  manufactured  products ;  exempted  incomes  up  to 
$1,000,  and  repealed  the  gross  receipts  tax  on  advertisements 
and  toll  roads.  The  act  of  February  3,  1868,  repealed  the 
tax  on  cotton;  the  act  of  March  31,  1868,  finally  removed  all 
taxes  upon  goods,  wares,  and  manufactures  except  those  on 
gas,  illuminating  oils,  tobacco,  liquors,  banks,  and  articles  upon 
which  the  tax  was  collected  by  means  of  stamps  ;  the  act  of  July 
30,  1868,  reduced  the  tax  upon  distilled  spirits  from  $2.00  to 
50  cents  per  gallon  ;  and  the  act  of  July  14,  1870,  brought  the 
system  of  internal  revenue  taxation  down  to  the  level  at  which 
it  was  maintained  until  1883.  The  taxes  left  were  those  on 
spirits,  tobacco,  fermented  liquor,  adhesive  stamps,  banks  and 
bankers,  and  a  small  amount  on  manufactures  and  products. 

In  general,  "  all  taxes  which  discriminated  against  prudence 
and  economy,  as  the  taxes  upon  repairs ;  against  knowledge, 
as  the  taxes  upon  books,  paper,  and  printing ;  against  capital 
and  thrift,  as  the  differential  income  tax  ;  against  the  trans- 
portation of  freight  by  boat  or  vehicles,  and  against  the  great 
leading  raw  materials,  as  coal  and  pig  iron,  cotton,  sugar,  and 
petroleum,"  were  quickly  swept  away,  leaving  taxes  which 
might  be  regarded  in  the  light  of  luxuries,  "  involving  an 
entirely  voluntary  assessment  on  the  part  of  the  consumer." 
The  special  licenses,  stamp,  corporation,  and  income  taxes 
were  continued,  but  later  in  1870,  when  the  debt  had  been 
largely  funded,  and  the  receipts  from  customs,  and  distilled 
and  malt  liquors  and  tobacco  showed  a  large  increase,  nearly 
all  the  license  taxes  except  those  on  brewers,  distillers,  and 
dealers  in  liquor  and  tobacco,  were  repealed.  The  income 
tax  was  continued  until  1872  with  the  rate  reduced  to  2  1-2 
per  cent,  upon  incomes  in  excess  of  $2,000. 


$300,000000 


250,000000 


200,000000 


150,000000  ~ 


ico.ooooco  - 


£0,000000  - 


1863 


No   IX.  — RECEIPTS    FROM    INTERNAL   REVENUE,  1863-1* 

(  For  continuation,  see  Chart  No.  n.) 


.66] 


Internal  Revenue  System. 


395 


The  receipts  from  the  principal  sources  of  internal  revenue, 
1 866-1 880,  were  as  follows  in  millions  of  dollars  :  — 


a 

0  S 
erg 

"2 

I 

TJ 

a. 

8 
c 

8. 
§ 

"E. 

S3  y 
T3~ 

-J 

3 

c  en 

0 

to 

0 

E 

"5 

■0 

a  00 

=  s 

J 

B    re 

■ 

T! 

0 

0 

c 

0 

s^s 

re  so 

rtj3 

'G 

Q 

In  a 

-1   c 
0  — 
H 

2 

n 

0 

6 

■ 
en 

,2 

•a 

< 

1866 

33-3 

5-2 

!6.S 

127.2 

3-5 

"•3 

14. 1 

15.0 

73.0 

310.9 

1867 

335 

6.1 

19.8 

91.5 

2.0 

7-4 

136 

16. 1 

66.0 

265.9 

1868 

18.7 

6.0 

18.7 

61.6 

1.9 

6-3 

11.9 

14.9 

41.  5 

191. 2 

1869 

45-o 

6.1 

23.4 

3-3 

2.2 

6-3 

9.9 

16.4 

34-8 

160.0 

1870 

55-6 

6-3 

3>-4 

3-° 

3° 

6.9 

no 

16.  s 

37-8 

185.2 

1871 

46-3 

7.4 

33-6 

3.6 

2.8 

5.0 

•5-3 

19.2 

144.0 

1872 

495 

8-3 

33-7 

4.6 

16.2 

»4-4 

131. 8 

1873 

52.1 

9-3 

34-4 

3-8 

7-7 

5' 

1 14. 1 

1874 

49-4 

9-3 

33-2 

3-4 

6.1 

102  6 

1875 

52.1 

9.1 

37-3 

4» 

6.6 

110.5 

1876 

56.4 

9.6 

39-8 

4.0 

6.5 

117.2 

1877 

57-5 

9-5 

41.1 

3-8 

6.5 

119. 0 

1878 

5°-4 

9-9 

40. 1 

3-5 

6.4 

in. 1 

1879 

5*-6 

10.7 

40.1 

3-2 

6.7 

113.9 

1880 

61.2 

12.8 

38.9 

3-3 

7-7 

134-5 

'  Products  of  iron,  wood,  glass,  paper,  cotton,  wool,  leather,  oil,  gas,  minerals,  etc 
1  Advertisements,  transportation  companies,  insurance  companies,  theatres,  etc. 
3  Total  includes  some  small  receipts  not  given  in  previous  columns. 

This  table  is  evidence  of  the  stability  of  internal  revenue 
taxes.  The  violent  change  in  the  receipts  from  distilled 
spirits  in  1868  was  due  to  special  circumstances,  as  frauds 
and  the  expectation  that  the  taxes  would  be  lowered,  which 
checked  the  withdrawal  of  spirits  stored  in  bond ;  once  the 
rate  was  adhered  to  the  proceeds  were  fairly  uniform.  The 
same  is  true  in  a  greater  degree  of  duties  on  fermented  liquors 
and  tobacco.  In  the  operations  of  the  internal  revenue  sys- 
tem of  this  period  there  are  two  points  of  interest :  taxes  were 
repealed  in  as  disorderly  a  way  as  they  were  originally  im- 
posed;  there  was  no  careful  adjustment  in  revision;  first  one 
bit  was  carved  off  and  then  another ;  in  the  second  place  the 
business  community  was  not  morally  robust  enough  to  accept 
in  times  of  peace  the  high  duties  which  prevailed  even  after 
the  wholesale  reductions  and  repeals  of  1870.  The  story  of 
the  administration  of  the  taxes  upon  distilled  spirits  is  discred- 


396  Banking  and  Taxation.  [§  167 

itable  ;  it  reflected  upon  the  honor  of  the  civil  service  engaged 
in  this  branch,  and  it  furnishes  an  illustration  of  the  demorali- 
zation of  influential  manufacturers  who  tried  by  corruption 
to  escape  payment  of  duties.  It  became  a  scandal  during 
Grant's  second  term,  and  only  by  the  most  determined  efforts 
of  Secretary  Bristow  were  the  intrigues  and  frauds  brought  to 

light. 

167.    Tariff  Changes. 

In  the  revision  of  tariff  duties  the  whole  question  of  protec- 
tion of  domestic  industries  was  once  more  raised.  Oppo- 
sition came  both  from  vested  interests  which  had  flourished 
under  the  artificial  aids  given  by  the  high  war  tariffs  and  also 
from  those  who  believed  in  restriction  and  protection  as  per- 
manent elements  of  national  policy.  The  conflict  of  opin- 
ion within  the  Republican  party  delayed  action  :  on  the  one 
hand  Representative  Morrill,  chairman  of  the  committee  on 
ways  and  means,  failed  in  1866  to  pass  a  highly  protective 
measure  ;  on  the  other  hand  the  tariff  measure  framed  in  1867 
by  Mr.  Wells  and  endorsed  by  Secretary  McCulloch,  which 
reduced  and  rearranged  duties,  was  defeated.  Actual  legisla- 
tion was  confined  to  the  act  of  March  2,  1867,  increasing  the 
duties  on  wool,  and  the  act  of  February  24,  1869,  which 
applied  to  one  commodity,  copper.  The  annually  increasing 
revenue,  however,  made  some  sort  of  general  revision  a  neces- 
sity ;  dissatisfaction  was  especially  marked  in  the  West,  where 
many  Republicans  with  protectionist  convictions  insisted  that 
public  opinion  called  for  a  reduction.  Garfield  for  example 
warned  the  House  of  Representatives  that  unless  the  protec- 
tionists recognized  the  signs  of  the  times  they  would  before 
long  be  compelled  to  submit  to  a  violent  reduction  made 
without  discrimination.  Even  Sherman  declared  that  Con- 
gress might  "  as  well  dismiss  to  future  generations  extreme 
ideas  of  free  trade  and  protection,  which  are  alike  inconsistent 
with  a  revenue  system."  The  strength  of  the  protectionist 
sentiment  throughout  the  country,  however,  was  not  appre- 
ciated ;  if  waning  it  was  certainly  reinforced  by  the  industrial 


§167]  Tariff  Changes.  397 

depression  after  1873;  for 'in  times  of  business  failure,  the 
country  is  little  likely  to  weaken  its  financial  props,  no  matter 
what  the  argument  of  final  advantage.  In  the  agricultural 
communities  of  the  East  and  Middle  States,  Greeley's  New 
York  "Tribune,"  with  his  weekly  plea  for  high  protection, 
had  great  influence.  Greeley  in  a  conversation  with  Garfield 
remarked,  "  If  I  had  my  way,  if  I  were  king  of  the  country,  I 
would  put  a  duty  of  $100  a  ton  on  pig  iron,  and  a  proportion- 
ate duty  on  everything  else  that  can  be  produced  in  America. 
The  result  would  be  that  our  people  would  be  obliged  to  supply 
their  own  wants,  manufactures  would  spring  up,  competition 
would  finally  reduce  prices,  and  we  would  live  wholly  within 
ourselves."  In  Congress  this  extreme  view  was  championed 
by  William  D.  Kelley  of  Pennsylvania,  whose  persistent  support 
of  duties  on  iron  secured  for  him  the  popular  title  of  "  Pig 
Iron  Kelley." 

The  tariff  duties  were  in  part  reduced  by  the  act  of  July  14, 
1870.  A  comprehensive  bill  was  originally  proposed,  but  the 
debate  was  so  prolonged  and  the  disagreements  so  compli- 
cated that  finally,  in  order  to  secure  any  legislation  whatever, 
portions  of  the  tariff  measure  were  added  to  an  internal 
revenue  bill  which  went  through.  It  was  a  half-hearted 
measure,  reducing  duties  on  articles  in  which  the  domestic 
industry  had  little  interest,  such  as  tea,  coffee,  wine,  sugar, 
molasses,  and  spices.  A  reduction  on  pig  iron  was  offset  by 
an  increase  on  steel  rails  and  a  few  other  articles. 

Again  in  1872  another  attempt  was  made  to  secure  reduc- 
tion ;  in  the  West  there  was  a  strong  and  growing  sentiment 
among  Republicans  in  favor  of  lowering  duties.  Farmers 
in  that  section  began  to  grumble  ;  and  an  additional  argument 
was  the  plethora  of  the  treasury  beyond  the  requirements  of 
the  sinking  fund.  Two  measures  were  introduced,  one  in 
the  House  and  one  in  the  Senate  ;  the  House  bill  was  the 
more  radical,  but  still  accepted  protectionism  as  a  valid  prin- 
ciple;  the  Senate  measure  proposed  simply  a  10  per  cent, 
horizontal  reduction.     The  Senate  bill  was  finally  accepted  as 


39« 


Banking  and  Taxation. 


[§  l68 


a  compromise.  In  addition  the  revenue  duties  on  tea  and 
coffee  were  abolished  and  some  special  reductions  were  made, 
as  in  the  case  of  salt  and  coal ;  while  the  free  list  of  raw  mate- 
rials entering  into  manufacture  was  slightly  extended.  The 
reduction  of  1872  was  hasty  and  ill-advised  and  too  much 
influenced  by  abnormal  importations  of  1871-1872.  The 
loss  of  duties  on  tea  and  coffee  alone  cut  off  an  annual  income 
of  about  $20,000,000.  After  the  panic  of  1873  revenue  fell; 
the  iron  and  steel  industry  in  particular  is  most  sensitive  to 
industrial  disorder,  and  duties  from  commodities  belonging 
to  this  group  shrank  to  but  a  fractional  part  of  former  returns, 
as  will  be  seen  by  referring  to  the  following  table  (in  millions 
of  dollars)  :  — 


0 

0 

u 

rt 

•0 

c 

in  v 

0 
S 

1 5 

0 

V 

E 

s  3 

E 

■73    V 

is 

2 

"o 

H 

zl  a 
C/5 

.0 

O 

H 

■  B 

a  c  . 
0  rt 

ll 

8  a 

"    P8 

B 
a 

0 

5 

Jz  s 

« 
E 

E 

£ 

I 

1869 

35-' 

11.5 

9.8 

7-2 

2.9 

13.8 

25.6 

8.2 

12.7 

5-7 

180.0 

1870 

40.7 

12.7 

10.2 

8.0 

3»7 

iS- 1 

26.1 

9.2 

13-9 

5-7 

1945 

1871 

32.6 

1 1.0 

8.3 

8.4 

4.8 

18.7 

33-6 

10.8 

18.0 

6.5 

206.3 

1872 

31.0 

7-2 

5-i 

8.6 

5-5 

21.9 

42.0 

'2-3 

20.3 

7-3 

216.4 

1873 

32.0 

8.7 

6-3 

18.2 

38.  S 

11. 6 

17-3 

7.2 

188. 1 

1874 

34-9 

8.0 

6.2 

10.9 

32-3 

9.0 

14.2 

6.2 

163.1 

1875 

37-2 

6.9 

4-3 

6.8 

30.9 

8.0 

14.0 

6.2 

157-2 

1876 

41.9 

6.1 

4-7 

4-7 

25-3 

6.6 

13-9 

5-4 

148. 1 

1877 

37-' 

5.6 

4-4 

3-8 

20.3 

6-5 

12.8 

5-3 

i3"-° 

1878 

38.8 

5.0 

4.6 

3-3 

19.9 

6.6 

12.2 

5-2 

130-2 

1879 

403 

5.2 

4-3 

3-7 

18.8 

10.0 

14.0 

5-4 

'37-3 

1880 

42.2 

6.0 

4-7 

19.2 

29.2 

10.8 

18.6 

6.0 

186.5 

1  The  totals  in  this  column  include  miscellaneous  classes  which  have  been  omitted. 

As  customs  receipts  fell  in  two  years,  from  $216,000,000 
in  1872  to  $163,000,000,  caused  by  the  reduction  of  duties 
and  the  embarrassments  of  the  panic  of  1873,  the  10  per  cent, 
horizontal  reduction  was  repealed  in  1875.  This  practically 
completed  the  tariff  legislation  until  the  general  act  of  1883. 

168.    Receipts  and  Expenditures,  1866-1879. 
The  total  receipts  for  the  years  1866-18 79  are  shown  in  the 
following  table  :  — 


$25,000000  j_  INDIANS 

o      <= 


$250,000000 
200,000000 
150,000000 


100,000000 


50,000000 


$150,0000001- 
100,000000 


50,000000 


WAR 


NAVY 


INTEREST 


$50,000000}- 


PENSIONS 


MISCELLANEOUS 


1866 


1870 


$  50,000000 

0 

1880        1882 


No.   VIII— ORDINARY   EXPENDITURES,    1866-1882. 
(Continuation  of  Chart  No.  3,  different  scale.) 


1 68]         Receipts  and  Expenditures. 


399 


Customs 

Internal  revenue 

Other 

Total  net 
ordinary 

1866 

$179,046,000 

$309,226,000 

$31,667,000 

$519,949,000 
462,846  000 

1867 

176,417,000 

266,027,000 

20,402,000 

1868 

164,464,000 

191,087,000 

20,8X3,000 

376,434,000 

1869 

180,048,000 

158,356,000 

18,784,000 

357,188.000 

1870 

194,538,000 

184,899,000 

16,522,000 

395,959  000 

1871 

206,270,000 

143,098,000 

25,063,000 

374,431,000 

1872 

216,370,000 

130,642,000 

17,682,000 

364,694,000 

1 87  J 

188,089,000 

113,729,000 

20,359,000 

322,177,000 

1874 

163,103,000 

102,409,000 

34,429,000 

299,941,000 

1875 

157,167,000 

110,007,000 

16,846,000 

284,020,000 

1876 

148,071,000 

116,700,000 

25,295,000 

290,066,000 

1877 

130,956,000 

118,630,000 

31,414,000 

281,000,000 

1878 

130, 170,000 

110,581,000 

16,695,000 

*57,446,ooo 

1879 

137,250,000 

113,561,000 

21,511,000 

272,322,000 

The  miscellaneous  receipts  under  "  other  "  in  the  above  table 
require  some  explanation.  The  sales  of  public  land  yielded 
from  $1,000,000  to  $4,000,000  annually;  the  tax  on  circula- 
tion and  deposits  on  national  banks  was  nearly  constant,  approx- 
imately $7,000,000 ;  the  premium  on  sales  of  gold  yielded  several 
millions  ;  fees,  —  including  consular,  letters  patent,  steamboats 
and  land,  —  proceeds  of  sales  of  government  property,  fines  and 
penalties,  and  repayment  of  interest  by  Pacific  Railway  Com- 
panies account  for  most  of  the  balance.  In  1874  the  award 
of  the  Geneva  tribunal,  $15,500,000  is  credited  to  the  treasury. 

Expenditures  for  the  principal  objects  of  government  dur- 
ing the  years  1 866-1 879  were  as  follows  :  — 


War 

Navy 

Pensions 

Interest  on 
debt 

Indians 

Miscel- 
laneous 

Total 

1866 

$283,154,000 

$43,285,000 

$15,605,000 

$133,067,000 

$3,295,000 

$40,613,000 

$519,022,000 

1867 

95,224,000 

31,034,000 

20,93'o,ooo 

143,781,000 

4,642,000 

51,110,000 

346,729,000 

1868 

123,246,000 

25,775,000 

23,782,000 

140,424,000 

4,100,000 

53,009  000 

370,339,000 

1869 

78,501,000 

20,000,000 

28,476,000 

130,694,000 

7,042,000 

56,474,000 

321,190,000 

1870 

57,655,000 

21,780,000 

28,340,000 

•29.235)000 

3,407,000 

53,237,000 

293,657,000 
283,160,000 

1871 

35,799,000 

19,431,000 

34,443,000 

125,576,000 

7,426,000 

60, 481 ,000 

1872 

35,372,000 

21,249.000 

28,533,000 

117,357,000 

7,061,000 

60,984,000 

270,559.000 
285,239,000 

1873 

.46,323,000 

23,526,000 

29.359,000 

104,750,000 

7,951,000 

73,328,000 

1*74 

42,313.000 

30,932,000 

29,038.000 

107,119,000 

6,692,000 

85,141,000 

301.239,000 

1875 

41,120,000 

21,497,000 

29,456,000 

103,093,000 

8,384,000 

71,070,000 

274,623,000 

187b 

38,070,000 

18,963,000 

28,257,000 

100,243,000 

5,966,000 

73,590.000 

265,101,000 

•  877 

37,082,000 

14,959,000 

1   27,963,000 

97,124,000 

5,277,000 

58,926,000 

141.334.000 

1878 

32,154,000 

17,365,000 

:   27,137,000 

102,500,000 

4,629,000 

53.'77.ooo 

236,964,000 

•  879 

40,425,000 

15,125,000 

35,121,000 

105,327,000 

5,206,000 

65,741,000 

266,948,000 

400 


Banking  and  Taxation. 


[§  ,68 


We  have  now  reached  a  period  when  the  amounts  involved 
in  the  classification  of  the  expenditures  as  returned  in  the 
summary  tables  of  the  "  Finance  Reports  "  are  so  crude  that 
a  more  minute  analysis  of  the  figures  is  necessary  in  order  to 
give  even  a  slight  comprehension  of  the  meaning  of  the  enor- 
mous outlay  of  the  government.  Particularly  is  this  true  of  the 
columns  entitled  "War  "  and  "  Miscellaneous."  Unfortunately 
the  reports  of  the  treasury  department  do  not  furnish  any 
detailed  tabulations  for  the  period  in  question,  and  as  there  is 
no  uniformity  in  the  tables  of  expense  given  from  year  to  year 
a  table  of  only  approximate  completeness  can  be  compiled. 
For  example  the  title  "War"  is  misleading;  expenditures 
under  this  item  include  outlay  for  the  support  of  the  army, 
ordnance,  signal  service,  forts,  and  fortifications,  suppressing 
Indian  hostilities,  bounties,  reimbursements  to  States  for  raising 
volunteers,  claims  of  loyal  citizens  for  supplies,  and,  most  alien 
of  all,  improvements  of  rivers  and  harbors.  During  this 
period  the  annual  amounts  expended  for  rivers  and  harbors 
were  as  follows  in  millions  of  dollars  :  — 


1866 

•3 

1874 

5-7 

1867 

1.2 

1875 

6.4 

1868 

3-5 

1876 

5-7 

1869 

3-5 

1877 

4-7 

1870 

3-5 

1878 

3-8 

1871 

4-4 

1879 

8-3 

1872 

5.0 

1880 

8.1 

J  873 

6-3 

1881 

9.1 

The  general  title  "  Miscellaneous  "  covers  up  expenditures 
of  the  most  varied  character,  and  in  order  to  illustrate  the 
growth  of  the  governmental  activity  after  the  Civil  War  and 
the  variety  of  objects  supported  from  the  national  treasury, 
the  following  detailed  table  for  a  few  items  is  given  in 
millions  of  dollars  :  — 


168]         Receipts  and  Expenditures.  401 


MISCELLANEOUS  EXPENDITURES. 

Civil 

Foreign 
inter- 

Expenses 
of  col- 

Expenses 
of  col- 
lecting 
internal 

Postal 
defi- 

Mint 

Light- 

Public 
build- 

Total* 

course 

ciency 

ings 

revenue 

1866 

".3 

'•3 

s' 4 

5.8 

•7 

1-4 

•3 

40.6 

1867 

15.6 

••5 

5-7 

7-9 

2.6 

•9 

2.2 

1. 1 

5»-» 

1868 

12.0 

1.4 

7.6 

8.7 

•  7 

2.6 

'•4 

530 

1869 

12.4 

8.4  l 

5-4 

7-2 

2-5 

.8 

1.9 

i-5 

565 

1870 

19.0 

«-5 

6.3 

7-2 

2.8 

1.1 

2.6 

2.2 

53-2 

1871 

18.8 

1.6 

6.6 

7-' 

3-7 

1.0 

2-7 

2.8 

60.4 

1872 

16.2 

1.8 

7.0 

5-7 

3-6 

.8 

3-i 

4.0 

61.0 

1873 

19-3 

1.6 

7-' 

5-3 

4.8 

•7 

2.9 

6.8 

73-3 

1874 

.7.6 

b| 

7-3 

4.6 

4-2 

1.3 

25 

7-2 

851  5 

1875 

'7-3 

3-2  > 

7.0 

4-3 

b-S 

1.3 

2.9 

8.6 

71. 1 

1876 

17.2 

••4 

6.7 

3-9 

4-5 

>-4 

2-7 

4-7 

73-6 

1677 

15.8 

1.2 

6.5 

3.6 

5-7 

1.3 

2.4 

5-i 

589 

1878 

16.6 

1.2 

5.8 

3-3 

5.6 

1.0 

2.2 

2.9 

582 

1879 

16.4 

6.8  » 

55 

3-5 

5-3 

1.0 

23 

3-4 

63.7 

1  Including  $7,200,000  payment  for  Alaska. 

*  Including  $1,900,000  British  claims. 

3  Including  $5,500,000  award  to  Great  Britain  by  Fisheries  Commission. 

*  Total  includes  other  items  in  addition  to  those  given  in  previous  columns.  This 
table  is  only  approximately  correct,  the  figures  being  selected  from  the  accounts  at  the 
end  of  the  report  of  the  secretary  of  the  treasury. 

;'  Including  award  of  Geneva  Tribunal,  $15,500,000,  investment  account. 

The  following  table  compares  the  total  receipts  and  expend- 
itures, 1866-1879,  in  millions  of  dollars  :  — 


Receipts 

Expendi- 
tures 

Surplus 

Deficit 

Taxes 

Other 

Total 

1866 
1867 
1868 
1869 
1870 

.87. 

1873 
1873 
1874 
1875 
1876 
1877 
1878 
1879 

490.3 
446.6 
357-3 
339-2 
379-7 
349-9 
347-° 
302.1 
2655 
267. 2 
264.9 
249.6 
240.7 
250.8 

297 
16.3 
19. 1 
18.0 
16.3 

24-5 

»7-7 
30. 1 
34-4 
16.8 
»5-2 
3'-4 
16.7 
21.  s 

519-9 
462.8 

376-4 
357-2 
3960 

374-4 
364.7 
322.2 
209.9 
284.0 
290.1 
281.0 
*57-4 
»72.3 

519.0 
346.7 
37°-3 
■321.2 
293-7 
283.2 
270.6 
285.2 
301.3 
374.6 
265.1 
24'-3 
237-0 
266.9 

•9 
1 16. 1 
6.1 
36.0 
102.3 
91.2 
94-1 
370 

9-4 
25.0 
39-7 
20.4 

5-4 

«-3 

26 


CHAPTER   XVII. 
SILVER   AND    BANKING,    1873-1890. 

169.    References. 

Silver,  1873-1879:  Messages  and  Papers,  VII,  463-464  (1877),  486-488 
(Hayes' veto,  1878),  616-617  (1880);  Finance  Report,  1877,  pp.  xvi-xxv ; 
1878,  pp.  xiv-xvii ;  1880,  pp.  xviii-xxii;  Report  of  Monetary  Commission 
of  1876,  87-131  (evil  effects  of  demonetization ;  J.  A.  Garfield,  Works, 
II,  329-353  (1876-1880);  J.  Sherman,  Recollections,  I,  459-470 ;  11,603- 
635  (Bland  Act)  ;  J.  G.  Blaine,  Twenty  Years,  II,  602-611  ;  J.  J.  Knox, 
United  States  Notes,  149-155;  J.  L.  Laughlin,  History  of  Bimetallism, 
92-105  (act  of  1873),  209-243  (act  of  1878) ;  D.  K.  Watson,  History  of 
Coinage,  135-160  (act  of  1873),  168-178  (act  of  1878);  Bolles,  III.  373- 
397  ;  A.  D.  Noyes,  Thirty  Years  of  American  Finance,  35-42  ;  F.  W. 
Taussig,  Silver  Situation,  1-19  (act  of  1878) ;  H.  White,  213-223  (act  of 
1873)  ;  C.  J.  Bullock,  Monetary  History,  110-114  (references  to  Congres- 
sional Record);  Report  of  Monetary  Commission  (1898),  138-145;  J.  K. 
Upton,  Money  and  Politics,  197-226;  H.  B.  Russell,  International  Mone- 
tary Conferences,  150-192  ;  J.  T.  Cleary,  The  "  Crime"  of  1873,  m  Sound 
Currency,  III,  No.  13  ;  F.  A.  Walker,  Discussions  in  Economics  and  Sta- 
tistics, I,  177-191. 

Silver,  1880-1889:  Messages  and  Papers,  VIII,  243  (1884)  ;  342-346 
(Cleveland,  1885);  Finance  Report,  1881,  pp.  xiv-xv;  1884,  pp.  xxix- 
xxxiv  ;  1885,  pp.  xvi-xxxiv  (Secretary  Manning) ;  1886,  xix-xxxix  ;  1889, 
lx-lxxxiv  (Secretary  Windom) ;  F.  W.  Taussig,  The  Silver  Situation, 
19-48;  J.  L.  Laughlin,  History  of  Bimetallism,  243-254;  A.  D.  Noyes, 
Thirty  Years  of  American  Finance,  75-82,  96-99,  103-112,  138-145;  H. 
White,  The  Silver  Situation,  in  Quar. /our.  Econ.,  IV  (1890),  397-407; 
W.  C.  Ford,  Silver  or  Legal  Tender  Notes,  in  Pol.  Sci.  Quar.,  IV  (1889), 
61 5-627  ;  G.  S.  Coe,  Bank  Notes  and  the  Silver  Danger,  Bankers'  Maga- 
zine, XXXVIII,  367;  R.  P.  Bland,  Restoration  of  Silver,  in  Forum,  II 
(1887),  243;  Shall  Silver  be  Demonetized?  in  No.  Amer.  Rev.,  vol.  140 
(1885),  485;  vol.  141,  p.  491  (discussion);  W.  M.  Stewart,  Contraction 
of  the  Currency,  in  No.  Amer.  Rev.,  vol.  146  (1888),  327  ;  D.  A.  Voorhees, 
Plea  for  Silver  Coinage,  in  No.  Amer.  Rev.,  vol.  153,  p.  524  ;  Consult  under 
"  Silver"  in  Poole's  Index,  First  Supplement  (1882-1887),  p.  403  ;  vol.  Ill 
(1887-1892),  p.  393. 

402 


§170]  Demonetization  of  Silver.  403 

170.    Demonetization  of  Silver. 

The  long  record  of  agitation,  debate,  and  legislation  on 
silver  belongs  more  strictly  to  monetary  history,  but  since 
the  treasury  was  forced  to  support  a  coinage  of  inferior  bullion 
value  at  a  parity  with  gold,  it  demands  a  careful  consideration 
from  students  of  American  governmental  finance.  During  the 
Civil  War  and  for  some  years  afterwards,  there  was  practically 
no  public  discussion  in  this  country  as  to  the  use  of  silver  as  a 
monetary  medium.  Silver  was  slightly  undervalued  at  the  mint 
and  never  except  in  insignificant  amounts  had  been  coined  into 
dollars ;  only  as  minor  coin  did  it  appear  in  circulation.  In 
1866  a  revision  of  all  the  laws  relating  to  mintage  and  coinage 
was  suggested  in  order  to  provide  a  code  or  compendium 
which  would  more  clearly  correspond  to  existing  technical  and 
commercial  needs;  and  in  1869  a  committee  composed  of 
Knox,  comptroller  of  the  currency,  and  Linderman,  director 
of  the  mint,  was  appointed  to  consider  the  subject ;  the  follow- 
ing year  a  report  was  submitted  which  among  other  provisions 
recommended  that  the  silver  dollar  be  dropped  from  the  list 
of  coins.  In  view  of  the  prolonged  dispute  over  demonetiza- 
tion the  paragraph  in  the  report  concerning  the  silver  dollar  is 
in  part  reprinted  :  — 

"  The  coinage  of  the  silver  dollar  piece,  ...  is  discon- 
tinued in  the  proposed  bill.  .  .  .  The  present  gold  dollar 
piece  is  made  the  dollar  unit  in  the  proposed  bill,  and  the 
silver  dollar  piece  is  discontinued.  If,  however,  such  a  coin 
is  authorized,  it  should  be  issued  only  as  a  commercial  dollar, 
not  as  a  standard  unit  of  account,  and  of  the  exact  value 
of  the  Mexican  dollar,  which  is  the  favorite  for  circulation 
in  China  and  Japan  and  other  oriental  countries." 

The  bill  as  a  whole  was  a  "  mint  "  bill,  designed  to  correct 
ambiguities  in  the  law  of  coinage  ;  and  there  is  no  evidence 
that  it  was  intended  to  reorganize  the  monetary  system.  The 
silver  dollar  was  not  and  had  not  been  in  general  circula- 
tion for  years.     The  first  bill  to  carry  out  general  revision, 


404  Silver  and  Banking.  [§  170 

which  was  introduced  in  April,  1870,  did,  however,  provide 
for  the  coinage  of  a  silver  dollar,  limited  in  legal  tender  to 
five  dollars  in  any  one  payment.  It  failed  through  lack  of 
consideration  in  the  House  after  passage  in  the  Senate ;  a 
second  effort  succeeded,  and  a  bill  revising  and  amending 
the  laws  relative  to  the  mint,  assay  offices,  and  coinage 
of  the  United  States  passed  the  House  May  27,  1872,  by 
a  vote  of  no  to  113,  and  the  Senate,  January  17,  1873, 
with  no  dissenting  votes.  In  this  act  the  only  mention  made 
of  any  silver  dollar  was  one  of  420  grains  designed  to  meet 
the  special  trade  in  the  Orient.  At  the  time  the  omission 
of  the  standard  silver  dollar  of  412^  grains  occasioned  no 
comment,  but  in  the  subsequent  fierce  and  partisan  discus- 
sions there  has  been  a  persistent  endeavor  to  prove  that 
the  act  of  1873  was  the  result  of  a  conspiracy  on  the  part  of 
Eastern  bankers  and  legislators  to  demonetize  silver  without 
the  general  knowledge  of  the  public.  So  determined  has 
been  this  effort  to  discredit  the  act  that  the  episode  has  been 
frequently  referred  to  by  supporters  of  silver  as  the  "  Crime 
of  1873." 

There  is  no  space  to  enter  at  length  upon  the  evidence 
surrounding  the  passage  of  this  act,  but  it  is  believed  that 
the  most  careful  investigation  on  the  part  of  the  inquirer 
accustomed  to  the  use  of  public  documents  will  not  disclose 
any  intention  of  deceit.  There  was  no  prolonged  debate 
over  the  demonetization  of  silver,  for  at  the  time  there  was 
little  interest  either  in  Congress  or  out  of  Congress  in  the 
fortunes  of  the  silver  dollar.  The  evidence  connected  with 
this  legislative  episode  has  been  examined  at  length  by  Pro- 
fessor Laughlin  in  "  History  of  Bimetallism  in  the  United 
States,"  and  by  Mr.  Horace  White  in  his  "  Money  and  Bank- 
ing," and,  if  their  conclusions  be  regarded  as  influenced  by  a 
long  and  continued  advocacy  of  gold  monometallism,  the 
reader  is  referred  to  the  candid  statements  of  General  Walker, 
who  certainly  had  no  sympathy  with  efforts  to  limit  the  world's 
supply  of  metallic  money.     The  latter   says,  "  Now,  as  one 


§171]         Struggle  for  Free  Coinage.  405 

who  has  read  a  good  deal  on  both  sides  on  this  subject,  I  do 
not  believe  that  any  fraud  was  committed  or  intended.  .  .  . 
Our  public  men  had  had  almost  no  training  in  economics  of 
finance.     Very  few  people  knew  what  the   monetary  system 

of  the  country  was Few  Congressmen  outside  of  the 

committee  knew  that  any  vital  change  was  impending.  The 
measure  passed  through  the  usual  course." x  While  Mr.  Walker 
discredits  the  allegation  of  fraud  and  of  sinister  motives  he 
affirms  that  there  was  a  "grievance,"  inasmuch  as  the  pro- 
moters of  the  measure  did  not  call  attention  sharply  to  the 
changes  proposed  by  the  measure  and  make  sure  that  its 
bearings  were  fully  comprehended.  This,  however,  raises 
the  whole  question  of  the  merits  of  bimetallism,  a  subject 
beyond  the  province  of  the  present  narrative. 

A  striking  illustration  of  the  ignorance  of  this  law,  where  it 
would  be  least  expected,  is  seen  in  a  letter  of  President 
Grant,  October  6,  1873,  several  months  after  the  passage 
of  the  act.  In  discussing  the  panic,  its  causes  and  methods 
of  relief,  he  expressed  a  "wonder  that  silver  is  not  already 
coming  into  the  market  to  supply  the  deficiency  of  the  circu- 
lating medium.  ...  I  want  to  see  the  hoarding  of  something 
that  has  a  standard  of  value  the  world  over.  Silver  has  this, 
and  if  we  once  get  back  to  that  our  strides  toward  a  higher 
appreciation  of  our  currency  will  be  rapid." 

171.    Struggle  for  Free  Coinage;  Bland  Act. 

It  was  not  long  before  the  omission  was  brought  to  general 
notice,  through  a  variety  of  causes  which  were  assailing  the 
whole  structure  of  national  finance.  The  panic  of  1873 
with  the  continued  after  depression  aroused  to  new  activity 
all  who  were  convinced  that  relief  depended  upon  fresh 
supplies  of  government  money;  the  veto  of  the  inflation 
bill  by  President  Grant,  however,  checked  any  possible 
increase  of  treasury  notes.  The  demonetization  of  silver 
and  the  adoption  of  a  gold  standard  by  Germany  in  1871, 

1  Walker,  Discussions  in  Economics  and  Statisticsl  vol.  i,  p.  183. 


406 


Silver  and    Bankin 


g- 


[§i7* 


the  limitation  of  coinage  of  full  legal-tender  silver  by  the 
countries  of  the  Latin  Union  in  1874,  coupled  with  the  dis- 
covery of  silver  mines  of  large  yield  in  this  country,  quickly 
unsettled  the  price  of  silver;  it  was  natural,  therefore,  that 
both  those  who  were  interested  in  silver  as  a  salable  com- 
modity and  those  who  were  earnestly  convinced  of  the  need 
of  an  enlarged  money  supply  should  join  hands  in  the  protest 
against  the  demonetization  of  silver. 

The  drop  in  the  market   price   of  silver  is  shown  in  the 
following  table :  — 


Price  of  silver 

per  ouncs  in 

Ratio  of  gold 

London,  in 

to  silver 

pence 

1840 

oog 

15.61 

1850 

Ws 

15.70 

i860 

6Ili 

15.29 

1870 

6oft 

15-57 

1871 

60J 

'5-57 

1872 

6or*„ 

'563 

1873 

S9i 

15.92 

1874 

S*A 

16.17 

1875 

56J 

16.58 

1876 

5*i 

17.87 

1877 

54  H 

17.22 

1878 

521% 

'7-94 

1879 

5'i 

18.39 

1880 

5*i 

18.04 

1885 

48| 

19-39 

1890 

47H 

19.77 

189s 

29I 

3'-57 

After  a  resolute  agitation  a  bill  introduced  by  Mr.  Bland  of 
Missouri,  July  25,  1876,  providing  for  free  and  unlimited  coin- 
age of  silver,  passed  the  House  of  Representatives  November  5, 
1877,  by  a  vote  of  163  to  34.  The  Senate,  however,  under 
the  leadership  of  Senator  Allison,  changed  the  bill  by  limiting 
the  volume  of  coinage,  and  in  this  form  the  measure  was 
enacted ;    it  restored  the   full  legal-tender  character   of  the 


1  / 
</ 

i 
J 
1 

1 
i 
1 
J 
1 

\ 

\Z_ 

;      J 

*■■*-»  • 

• 

\_ 

"              '' 

1 

i             -.^ 

** 

f-V.^ 

% 

^'' 

i 

\ 

i 
\ 
i 

X 

X 

\ 

1 

1 

\ 

I 

1 

1 

/ 
1 
1 

\ 
\ 

\ 

/ 

' 

t 

/* 

\ 

\ 
\ 

f 

1 

t 
1 

1 

1 

\ 

L 

M    | 


§  172]      Coinage  under  the  Bland  Act.         407 

silver  dollar  and  authorized  the  secretary  of  the  treasury 
to  purchase  silver  bullion  at  the  market  price,  not  less  than 
$2,000,000  nor  more  than  $4,000,000  worth  per  month,  and 
coin  the  same  into  dollars.  Provision  was  also  made  for  the 
issue  of  silver  certificates  upon  deposit  of  silver  dollars,  in 
denominations  not  less  than  ten  dollars.  The  vote  in  the  Sen- 
ate was  48  to  21.  President  Hayes  vetoed  the  measure,  but 
the  silver  sentiment  in  each  House  was  strong  enough  to  pass 
the  bill  over  his  veto.  This  act  demanded  the  expenditure  of 
at  least  $24,000,000  per  annum  in  the  purchase  of  a  com- 
modity which  was  falling  in  value  in  the  world's  markets,  and 
which  ultimately  might  be  constituted  a  lien  upon  the  gold 
assets  of  the  treasury. 

172.    Coinage  under  the  Bland  Act. 

The  Bland-Allison  Act  continued  in  operation  until  1890, 
and  during  the  twelve  years  of  its  existence  was  the  occasion 
of  the  coinage  of  378,166,000  silver  dollars.  By  years  the 
coinage  and  issue  of  silver  certificates  were  as  follows  in  mill- 
ions of  dollars  :  — 


July  1 

Silver  dollars 

Silver  certifi- 

issued to  date 

cates  issued 

1878 

8.6 

1.9 

1879 

3S-8 

2-5 

1880 

63-7 

12.4 

1881 

91.4 

51.2 

1882 

119.1 

66.1 

1883 

•47-3 

88.6 

1884 

•75-4 

120.9 

1885 

203.9 

•39-9 

1886 

233-7 

1 16.0 

1887 

267.0 

'45-5 

1888 

299.7 

229.5 

1889 

333-5 

262.6 

1890 

3°9-4 

301.5 

The  purchase  value  of  the  silver  in  this  coinage  was  #308,- 
279,000,  yielding  a  seigniorage  of  nearly  $70,000,000  which 
was  turned  into  the  treasury.  From  the  beginning  it  was  dif- 
ficult to  keep  the  silver  dollars  in  circulation.     The  New  York 


408  Silver  and  Banking.  [§  172 

banks  at  the  outset,  November  12,  1878,  placed  their  stamp  of 
disapproval  upon  them  by  adopting  a  rule  prohibiting  the 
payment  of  balances  between  banks  belonging  to  the  clearing- 
house, in  silver,  either  in  coin  or  certificates.  As  Congress  by 
the  act  of  August  12,  1882,  attempted  reprisal  by  refusing  an 
extension  of  charter  to  any  bank  that  should  continue  mem- 
bership in  a  clearing-house  refusing  silver,  the  banks  gave  way, 
but  they  were  then  accused  of  boycotting  silver  under  a  tacit 
agreement. 

Nor  did  the  coin  find  favor  with  the  public  at  large.  The 
people  were  not  accustomed  to  use  coins  of  heavy  weight,  and 
under  the  original  act  no  provision  was  made  for  the  issue  of 
silver  certificates  in  denominations  of  less  than  ten  dollars. 
The  government  labored  actively  to  get  the  dollars  into  cir- 
culation ;  it  not  only  required  disbursing  officers  to  use  silver 
dollars  in  payment  for  salaries  and  other  current  obligations, 
but  also  offered  to  place  the  silver  in  the  hands  of  the  people 
throughout  the  country  without  expense  for  transportation. 
Notwithstanding  these  endeavors,  Secretary  Sherman  in  1880 
represented  that  it  was  difficult  to  maintain  in  circulation 
more  than  35  per  cent,  of  the  amount  coined.  When  re- 
ceived by  creditors  the  coins  were  quickly  deposited  in  local 
banks,  and  by  them  transferred  to  city  institutions,  until  they 
finally  found  refuge  in  the  sub-treasuries  of  the  government. 
In  the  hope  of  making  the  silver  money  more  acceptable  to 
the  public,  Congress  in  1886  authorized  the  issue  of  silver  cer- 
tificates in  smaller  denominations,  of  $1,  $2,  and  $5,  and  the 
treasury  department,  by  hoarding  as  far  as  practicable  legal- 
tender  notes  of  small  denominations,  created  a  demand  for 
small  bills  which  it  met  with  silver  certificates.  A  reduction 
of  $126,000,000  in  bank-note  circulation  during  the  years 
1 886-1 890  also  helped  to  provide  an  outlet  for  silver,  and  at 
the  same  time  gave  point  to  the  contention  of  the  silver  advo- 
cates that  without  the  use  of  silver  the  volume  of  monetary 
medium  was  deficient. 


§  173]  Efforts  to  stop  Coinage.  409 

173.    Unsuccessful  Efforts  to  stop  Coinage. 

From  time  to  time  the  controversy  blazed  up  anew.  The 
treasury  department  felt  the  combined  burden  of  providing 
for  the  continued  purchase  of  silver,  of  coining  it  into  dollars, 
and  of  maintaining  a  gold  standard ;  and  endeavored  either 
through  the  message  of  the  president  or  the  report  of  the 
secretary  to  impress  upon  the  public  its  convictions.  McCul- 
loch,  in  1884  for  a  second  time  secretary  of  the  treasury,  dis- 
closed the  executive  apprehension  by  announcing  that  unless 
the  coinage  of  silver  dollars  was  suspended,  there  was  danger 
that  silver,  and  not  gold,  would  become  the  metallic  standard. 
In  1885  Secretary  Manning,  Cleveland's  finance  minister 
(1885-1889),  devoted  the  larger  part  of  his  annual  report  to 
currency  reform ;  the  latter  warned  Congress  that  the  hoard- 
ing of  gold  had  already  begun  ;  that  the  ceaseless  stream  of 
silver  threatened  to  overflow  the  land  and  cause  fear  and  un- 
certainty ;  and  in  conclusion  recommended  the  suspension  of 
compulsory  coinage. 

The  legislative  branch  of  the  government  paid  little  heed  to 
these  executive  appeals ;  in  the  country  at  large  there  was  in- 
dustrial unrest,  and  in  some  sections  undoubted  distress.  All 
commercial  ills  were  still  widely  supposed  to  be  due  to  an 
insufficient  volume  of  money.  The  greenback  advocacy  gave 
way  in  a  measure  to  the  agitation  for  the  coinage  of  silver, 
with  no  limitation  whatever  as  to  amount.  A  commercial  and 
financial  panic  in  1884  with  its  subsequent  depression  fur- 
nished the  complainants  with  abundant  illustration.  There 
had  been  administrative  mismanagement  of  important  rail- 
way companies,  an  excessive  construction  of  railways,  and  a 
wasteful  investment  of  capital  in  non-paying  enterprises.  Iron 
and  steel  industries  were  consequently  seriously  affected,  and 
this  in  turn  extended  the  circle  of  disturbance.  Many  mines 
were  shut  down,  and  for  a  time  there  was  a  large  "  army  "  of 
the  unemployed. 

While  general  conditions  did  not  become  so  bad  as  in  1873, 


410  Silver  and  Banking.  [§  174 

the  discouragement  was  marked,  because  the  reasons  for  com- 
mercial disaster  were  not  so  easily  seen.  After  a  partial  re- 
covery in  1885  there  was  an  unusual  outbreak  of  strikes, 
boycotts,  lockouts,  and  labor  disturbances  in  1886-188 7  j  labor 
organization  proceeded  rapidly  and  the  Knights  of  Labor  for 
a  brief  period  gained  great  power.  An  improvement  of  agri- 
cultural conditions  in  Europe  after  1880  lessened  the  demand 
for  American  produce,  and  tended  to  lower  the  price  of  the 
surplus  exported.  The  Western  farmer  attributed  his  evils  in 
part  to  the  railroads  and  in  part  to  the  demonetization  of 
silver.  "  Granger "  railway  legislation  to  control  rates  was 
consequently  sought  in  State  legislation,  and  unlimited  coinage 
of  silver  in  Congress.  International  bimetallists  of  repute  and 
authority  attributed  the  bitter  experience  of  trade  and  industry 
of  May,  1884,  "to  the  wanton  mischief  perpetrated  by  Ger- 
many between  187 1  and  1875  "  in  demonetizing  silver. 

Senators  and  representatives  of  both  the  great  parties  from 
Western  farming  and  mining  States  could  not  be  turned  from 
persistent  efforts  to  increase  the  volume  of  money ;  in  season 
and  out  of  season  they  attempted  to  attach  to  every  bill  which 
had  the  remotest  connection  with  government  finance  some 
proposition  which  would  either  secure  an  increase  of  treasury 
notes  or  add  to  the  coinage  of  silver.  The  strength  of  their 
sentiment  was  seen  in  1886,  when  a  free-coinage  bill  was  de- 
feated in  the  House  of  Representatives  by  a  majority  of  only 
37.  Although  the  extreme  silver  party  failed  to  carry  out  its 
projects,  its  opponents  equally  failed  to  stop  compulsory  coin- 
age. The  advocates  of  silver  also  made  strenuous  efforts  to 
force  the  treasury  department  to  pay  out  silver  indiscrimi- 
nately in  order  to  force  the  government  on  to  a  silver  basis,  but 
were  defeated  by  Secretary  Manning,  who  stanchly  declared 
that  he  would  not  pay  silver  except  when  silver  was  asked  for. 

174.    Continued  Opposition  to  National  Banks. 

The  elements  which  supported  an  enlarged  issue  of  paper 
money  or  the  unlimited  coinage  of  silver  kept  alive  antago- 


§  175]       Decline  in  Bank  Circulation.         411 

nism  to  the  national  banks  and  opposed  all  legislation  tending 
to  relieve  the  difficulties  which  the  system  was  then  laboring 
under.  While  ever  ready  to  point  to  the  decline  of  bank- 
note circulation  as  an  illustration  of  the  evil  in  the  monetary 
system  which  demanded  rectification,  they  were  unwilling  to 
allow  expansion  through  banking  corporations.  The  banks 
could  expect  no  favors.  Popular  denunciation  of  banks  was 
rabid.  Bankers  were  represented  as  meeting  in  annual  con- 
ventions, "  eating  bonbons,  and  drinking  wine,  and  passing 
resolutions  "  hostile  to  public  interest;  men  were  supposed  to 
go  into  the  banking  business  for  selfish  interests  alone,  thus 
supplanting  the  government  which  had  a  heart  and  sympathy 
for  humanity ;  the  banks  were  said  to  defy  the  law  by  loaning 
money  to  Western  farmers  on  mortgages,  and  also  in  exacting 
extortionate  rates  of  interest.  The  banking  interest  was  typi- 
fied as  the  supreme  leader  in  the  active  opposition  to  an 
expanding  monetary  supply.  The  banks  were  constantly 
made  to  hear  about  their  earlier  hostility  to  the  greenback 
financiering  of  the  Civil  War ;  attention  was  directed  to  their 
attempt  to  retire  the  greenback  circulation,  and  to  their 
antagonism  to  the  Bland  Act  by  refusing  to  accept  silver  dol- 
lars. They  were  charged  with  trying  to  create  a  panic  in 
1 88 1  by  withdrawing  $19,000,000  of  currency  in  order  to 
frighten  Congress  which  passed  a  bill,  vetoed  by  the  president, 
to  make  the  conditions  of  note  issue  less  profitable ;  and  also 
with  working  in  the  same  year  to  prevent  the  refunding  of  the 
debt,  then  maturing,  at  a  lower  rate  of  interest. 

175.    Decline  in  Bank  Circulation. 

The  commercial  reasons  for  the  reduction  of  the  national 
bank-note  issues  are  not  far  to  seek ;  the  government  in  pay- 
ing off  its  debt  limited  the  supply  of  bonds  which  could  be 
bought  by  the  banks,  and  at  the  same  time  there  was  an 
increasing  demand  for  government  securities  by  individuals, 
trustees,  and  financial  corporations    for  investment.     In  this 


412 


Silver  and  Banking. 


[§  »75 


way  the  bonds  advanced  to  so  high  a  premium  that  it  was 
unprofitable  for  the  banks  to  retain  them  even  with  the  accom- 
panying privilege  of  circulation.  This  is  well  illustrated  in  the 
accompanying  chart.  The  steady  shrinkage  of  circulation 
which  took  place,  beginning  with  the  year  1880,  is  seen  in 
the  following  table  :  — 


July  1 

Volume  of  national 

July  1 

Volume  of  national 

bank-notes 

bank-notes 

1880 

$344,505,000 

1886 

$311,699,000 

18S1 

355,042,000 

1887 

279,217,000 

1882 

358,742,000 

1888 

252,368,000 

1883 

356,073,000 

1889 

21 1,378,000 

1884 

339.499. 000 

1800 

185,970,000 

1885 

318,576,000 

1891 

167,927,000 

Repeated  but  unsuccessful  efforts  were  made  in  behalf  of  the 
banks  to  secure  laws  less  onerous  to  circulation.  Among  the 
measures  proposed  was  an  increase  of  notes  to  the  face  value 
of  the  bonds  deposited,  the  plan  finally  adopted  in  1900,  or  to 
90  per  cent,  of  the  market  value  of  the  bonds  as  measured  by 
their  average  market  value  for  the  six  months  previous ;  the 
acceptance  of  bonds  of  the  District  of  Columbia,  guaranteed 
by  the  United  States ;  repeal  of  the  tax  on  circulation  ;  fund- 
ing of  the  high-rate  bonds  into  a  new  issue  bearing  a  lower 
rate  of  interest  and  running  for  a  longer  period  of  time;  sub- 
stitution of  some  other  security,  as  State,  county,  or  municipal 
bonds  for  United  States  bonds  as  a  basis  for  circulation  ;  per- 
mission to  banks  to  issue  circulation  upon  their  general  credit, 
without  the  deposit  of  specific  securities  but  protected  by  a 
general  safety  fund,  as  in  the  old  New  York  system.  The 
proposition  which  found  general  approval  among  those  friendly 
to  the  banking  interest  was  to  refund  the  public  indebtedness 
into  a  long  low-rate  bond.  This  was  recommended  by  the 
comptroller  of  the  currency  in  1882  and  1883,  and  bills  to 
that  effect  were  advocated  in  Congress ;  the  defect  in  the  plan 
was  the  postponement  of  the  payment  of  the  debt.  Sugges- 
tions were  made  that  the  national  banking  system  be  continued 


§  175]       Decline  in  Bank  Circulation.         413 

without  the  feature  of  note  circulation,  since  the  advantage  of 
federal  banks  of  deposit  and  discount  was  well  worth  retaining. 
So  strong  and  persistent,  however,  was  the  opposition  to  any 
favors  whatever  to  banks  that  no  remedial  legislation  was 
obtained,  and  the  banks  were  obliged  to  accommodate  them- 
selves to  laws  antiquated  and  out  of  relation  to  the  marvellous 
commercial  and  industrial  expansion  of  the  country. 


CHAPTER  XVIII. 
SURPLUS    REVENUE   AND   TAXATION,    1880-1890. 

176.    References. 

Tariff  Legislation,  1880-1889:  Messages  and  Papers,  VIII,  580- 
591  (Cleveland,  1887);  Finance  Report,  1881,  pp.  xviii-xxi ;  1882,  pp. 
xxiv-xxxiii ;  1883,  pp.  xliv-lii ;  1884,  pp.  xv-xvii :  1886,  pp.  xlvii— lviii ; 
Report  of  the  Tariff  Commission,  1882,  I,  1-35;  50th  Cong.  1st  Sess. 
(1888),  Senate  Report,  No.  2332  (Aldrich),  pp.  89,  91-101  (minority); 
House  Report,  No.  1496,  pp.  102-m  (Mills  );  E.  McPherson,  Handbook  of 
Politics,  1884,  pp.  18-77,  I3S_I38;  1886,  pp.  149-156;  1888,  pp.  51-55, 
146-166;  1890,  pp.  169-189,  223-244;  J.  Sherman,  Recollections,  II,  841- 
855  (1883),  1004-1010;  W.  McKinley,  Speeches  and  Addresses,  70-123 
(Tariff  Commission,  1883),  131-159  (Morrison  bill),  250-262  (1888),  277- 
289  (minority  report  on  Mills  bill,  1888) ;  F.  W.  Taussig,  History  of  the 
Tariff,  230-250  (1883) ;  A.  D.  Noyes,  Thirty  Years  of  American  Finance, 
92-96;  The  National  Revenues  (ed.  A.  Shaw,  1888),  32-41,  78-123,  217- 
226;  O.  H.  Perry,  Proposed  Tariff  Legislation  since  1883,  in  Quar.  four. 
Econ.,  II  (1887),  69-78;  The  Tariff  Literature  in  the  Campaign,  in  Quar. 
four.  Econ.,  Ill  (1889),  212-217;  Stanwood,  II,  202-241. 

Internal  Revenue  :  Finance  Report,  1881,  pp.  xx,  64;  1882,  pp.  69- 
73;  1883,  1-lii;  1886,  lv-lvi;  1887,  xxix-xxxi ;  F.  C.  Howe,  Taxation 
tinder  the  Lnternal  Revenue  System,  165,  221-223;  R.  M.  Smith,  in  The 
National  Revenues  (ed.  A.  Shaw,  1888),  68-77. 

Surplus:  Messages  and  Papers,  VIII,  48,  134  (1882);  178  (1883); 
508-511  (1886) ;  580-583,  786-788  (1888);  Finance  Report,  1883,  pp.  xxx- 
xxxiii;  1886,  xl-xliv;  1887,  xxv-xxxiii;  E.  McPherson,  Handbook  of 
Politics,  1886,  pp.  225-229;  Bankers'  Magazine,  XLII  (1887),  335,  817- 
821;  XLIII  (1888),  321-324  (bond  purchases);  H.  C.  Adams,  Surplus 
Financiering,  in  The  National  Revenues,  45-55;  A.  D.  Noyes,  Thirty 
Years  of  American  Finance,  87-88,  123-126;  W.  McKinley,  Speeches  and 
Addresses,  203-211  (1886),  263-270  (1888) ;  C.  F.  Randolph,  Surplus  Rev- 
enue, in  Pol.  Sci.  Quar.,  Ill  (1888),  226-246;  Poole's  Index,  vol.  Ill 
(1882-1887),  consult  "  surplus,"  p.  416. 

Expenditures:  Messages  and  Papers,  WW,  120-122  (river  and  har- 
bor veto  of  Arthur,  1882),  137,  201,  246,  677,  837-843  (direct  tax  veto, 
1889) ;  A.  D.  Noyes,  Thirty  Years  of  American  Finance,  89 ;  E.  Mc- 
Pherson, Handbook  of  Politics,  1888,  pp.  173-174  (refunding  direct  tax)  : 
1890,  pp.  18-21  (ditto) ;  W.  H.  Glasson,  History  of  Military  Pension  Leg- 
islation in  the  U.  S.,  70-119. 

414 


§177]  Surplus  Revenue.  415 

177.     Surplus  Revenue. 

In  1882  there  was  a  large  balance  of  treasury  receipts  over 
expenditures,  and  a  prospect  of  similar  good  fortune  in  the 
future.  The  secretary  of  the  treasury  with  some  humor 
observed  that  times  had  changed  since  the  law  of  1 789  estab- 
lishing the  treasury  department,  which  made  it  the  duty  of 
the  secretary  to  prepare  plans  for  the  i?nprovement  of  the 
revenue  :  "  What  now  perplexes  the  secretary  is  not  wherefrom 
he  may  get  revenue  and  enough  for  the  pressing  needs  of  the 
government,  but  whereby  he  shall  turn  back  into  the  flow  of 
business  the  more  than  enough  for  those  needs,  that  has  been 
drawn  from  the  people."  A  reduction  in  the  internal  revenue 
duties,  together  with  a  change  in  trade  conditions  marked  by 
the  panic  of  1884  and  reflected  in  customs  receipts,  some- 
what cut  down  income,  while  more  liberal  expenditures 
by  Congress  put  off  for  a  brief  period  the  need  of  decisive 
action  to  prevent  a  surplus.  In  1886  a  substantial  surplus 
reappeared,  and  proved  to  be  the  beginning  of  a  series  of 
favorable  annual  balances;  as  in  1837,  nearly  half  a  century 
earlier,  the  problem  of  surplus  financiering  was  too  much  for 
the  statesmanship  of  Congress. 

In  1882  the  Republicans  were  still  in  power  and  the  prop- 
ositions of  Mr.  Folger,  Republican  secretary  of  the  treasury, 
have  special  significance ;  he  recognized  the  evil  of  large 
receipts  and  small  disbursements,  so  far  as  it  affected  the  busi- 
ness of  the  country ;  and  he  deprecated  taking  the  collections 
of  the  government  out  of  the  money  markets  in  sums  and 
at  dates  which  have  little  or  no  agreement  with  the  natural 
movement  of  money.  He  agreed  that  the  locking  up  of  no 
inconsiderable  proportion  of  the  currency  could  not  fail  to 
embarrass  trade.  Apparently  the  only  available  method  of 
disbursing  this  excess  of  assets  was  by  payment  of  the  debt ; 
but  the  remedy  seemed  unwise  in  view  of  the  ruling  premiums 
on  the  bonds  and  the  restrictions  regulating  the  official  call  of 
bonds.     At  all  events  the  secretary  thought  that  if  Congress 


41 6       Surplus  Revenue  and  Taxation.      [§  177 

wished  him  to  make  purchases  of  bonds  at  a  premium,  it  should 
assume  the  responsibility  more  explicitly  by  law. 

Secretary  Folger  also  discussed  the  possibility  of  relief  by 
the  deposit  of  public  moneys  in  national  banks,  but  held  it 
unwise  to  amend  the  laws  so  as  to  release  any  of  the  customs 
receipts  to  the  custody  of  these  institutions,  since  this  revenue 
was  to  a  great  extent  pledged  to  the  payment  of  the  interest 
and  principal  of  the  bonds,  and  the  government  ought  pru- 
dently to  take  heed  of  possible  financial  disturbance  and  dis- 
aster. Only  two  other  means  of  disposing  of  the  surplus 
occurred  to  the  secretary  :  one  was  to  parcel  out  the  surplus 
among  the  several  States  of  the  Union ;  the  other  to  complete 
the  terms  of  the  distribution  act  of  1836  by  paying  to  the 
States  the  amounts  due  in  the  fourth  instalment ;  neither  of 
these  propositions  received  any  countenance.  In  his  opinion 
the  only  radical  cure  was  in  the  reduction  of  taxation ;  there 
should  be  a  repeal  of  all  the  internal  duties  except  those  on 
spirits,  fermented  liquors,  tobacco,  and  bank  circulation,  and  a 
general  reduction  of  customs  duties  on  nearly  all  articles  in 
the  tariff.  This  recommendation  was  responded  to  by  the 
half-hearted  revision  of  1883. 

When  the  surplus  again  became  embarrassing  in  1886  the 
Democrats  were  in  power.  The  premium  on  the  bonds  was 
higher  than  ever,  and  Secretary  Manning  emphatically  con- 
demned any  policy  which  would  give  the  proceeds  of  taxation 
to  bondholders  in  premiums  by  anticipated  purchases,  nor  did 
he  expect  Congress  to  throw  upon  him  such  a  thriftless  task. 
He  also  frowned  upon  relief  through  extravagant  appro- 
priations, or  by  the  accumulation  of  a  treasury  hoard.  His 
positive  recommendations  were  reduction  of  taxation  and  re- 
tirement of  the  greenbacks ;  that  is,  of  the  unfunded  debt  of 
$346,000,000.  These  views  were  emphatically  endorsed  by 
President  Cleveland,  but  did  not  receive  the  undivided  sup- 
port of  the  Democratic  party  and  thus  came  to  nothing.  In 
1888  the  Democratic  platform  simply  called  for  tariff  revision 
and  the  reduction  of  extravagant  taxation.     The  Republicans 


§  178]  Funds  in  National  Banks.  417 

in  their  platform  of  that  year  "  would  effect  all  needed  reduc- 
tion of  the  national  revenue  by  repealing  the  taxes  on  tobacco, 
which  are  an  annoyance  and  burden  to  agriculture,  and  the 
tax  upon  spirits  used  in  the  arts  and  for  mechanical  purposes, 
and  by  such  revision  of  the  tariff  laws  as  will  tend  to  check 
imports  of  such  articles  as  are  produced  by  our  people." 
According  to  this  program,  if  further  relief  were  needed,  the 
entire  repeal  of  all  internal  revenue  taxes  was  preferable  to  the 
surrender  of  any  part  of  the  protective  system. 

Having  briefly  sketched  the  general  background,  the  follow- 
ing phases  of  the  whole  problem  of  surplus  revenue  which 
excited  public  attention  in  the  decade  1880— 1890  may  now 
be  considered  in  detail:  (1)  deposits  of  public  moneys  in 
banks ;  (2)  reduction  of  taxes  ;  (3)  increased  appropriations ; 
(4)  purchase  of  bonds  and  debt  reduction. 

178.    Deposit  of  Funds   in  National  Banks. 

As  has  been  stated,  the  original  national  bank  act  of  1863, 
so  modified  the  independent  treasury  act,  as  to  permit  national 
banks,  when  designated  by  the  secretary  of  the  treasury,  to  be 
depositories  of  certain  public  moneys  upon  pledging  with  the 
treasury  a  security  in  United  States  bonds.  The  total  gov- 
ernment balances  in  banks  varied  as  receipts  fluctuated,  and 
as  the  several  secretaries  pursued  different  policies.  In  Cleve- 
land's administration  from  1885  to  1889,  the  deposits  were 
increased  as  a  means  of  relief,  so  as  to  make  the  surplus 
revenues  commercially  available;  and  in  1888  they  reached 
$61,000,000.  Cleveland  did  not  consider  this  an  ideal  method 
of  disposing  of  government  funds,  and  submitted  to  it  only  as 
a  temporary  expedient  to  meet  an  urgent  necessity.  Critics 
taunted  the  treasury  department  with  virtual  partnership  with 
the  banks.  Mr.  Windom,  who  became  secretary  of  the 
treasury  in  1889,  representing  a  Republican  administration, 
changed  this  policy,  and  announced  that  he  should  reduce  the 
deposits  as  rapidly   as   possible  "leaving  only  such  amounts 

27 


41 8       Surplus  Revenue  and  Taxation.      [§  179 

as  are  necessary  for  the  business  transactions  of  the  govern- 
ment. The  national  bank  depositories  have  been,  and  are, 
useful  auxiliaries  to  the  sub-treasury  system,  but  the  deposit 
of  public  funds  therewith  to  an  amount  largely  in  excess  of 
the  needs  of  the  public  service  is  wholly  unjustifiable.  Such 
a  policy  is  contrary  to  the  spirit  of  the  act  of  August  6,  1846, 
which  contemplates  a  sub-treasury  independent  of  the  banks." 
Among  his  objections  were  :  a  temptation  to  favoritism ;  the 
dependence  of  the  treasury  upon  the  banks  on  account  of 
the  difficult  and  delicate  task  of  withdrawing  the  deposits ;  the 
injustice  of  granting  to  banks  the  free  use  of  money,  and  at 
the  same  time  paying  to  those  parties  interest  on  their  bonds 
pledged  as  security;  and  finally,  and  most  important  of  all, 
interference  with  business  whenever  it  was  necessary  to  with- 
draw the  deposits.  This  indictment  does  not  represent  the 
permanent  attitude  of  the  Republican  party,  for  in  the  later 
administration  of  President  McKinley  the  banks  were  again 
intrusted  with  generous  deposits. 

179.    Reduction  of  Internal  Revenue  Duties. 

So  long  as  revenues  were  heaped  up  in  the  treasury  beyond 
immediate  needs  either  for  current  expenditures  or  for  the 
sinking-fund  requirements,  it  was  natural  that  there  should  be 
a  growing  demand  for  a  reduction  of  taxation.  It  was  urged 
with  strong  effect  that  the  citizens  of  that  day  had  already 
paid  their  share  of  the  cost  of  the  war,  and  that  the  remain- 
ing portion  should  be  transferred  to  another  generation.  Many 
of  those  who  under  ordinary  circumstances  would  have  gladly 
continued  taxation  in  order  to  effect  a  rapid  extinguishment 
of  the  national  debt,  objected  strenuously  to  its  payment  if  it 
was  necessary  to  offer  premiums  to  the  fortunate  holders  of 
government  obligations.  This  reluctance  was  easily  turned 
into  bitter  opposition  by  those  who  were  openly  hostile  to  the 
national  banking  system ;  they  were  convinced  that  bond- 
holders and  bank  directors  were  synonymous  terms,  and  that 
the  banking  and  trust  institutions  which  had  bonds  in  large 


§  179]  Internal  Revenue  Duties.  419 

quantities  were  endeavoring  to  drive  a  hard  bargain  with  the 
government.  It  is  not  unlikely,  however,  that  banking  and 
financial  interests  were  content  that  the  debt  should  remain 
stationary,  in  order  that  there  might  be  no  withdrawal  of 
bonds  which  furnish  the  very  basis  of  the  banking  system. 

Reduction  of  taxation  could  be  brought  about  either  by 
changes  in  the  internal  revenue  or  in  the  customs  schedules. 
The  former  appeared  the  more  attractive  field  for  immediate 
action,  inasmuch  as  internal  revenue  taxes  were  popularly 
regarded  as  war  duties,  to  be  abandoned  as  soon  as  practicable 
in  times  of  peace,  and  their  modification  would  not  affect 
unfavorably  vested  manufacturing  interests  as  much  as  would 
changes  in  the  tariff.  Extreme  protectionists  wished  the  abo- 
lition of  all  internal  revenue  duties ;  Kelley  argued  with  great 
elaborateness  that  their  maintenance  was  a  wanton  exaction, 
costing  in  its  administration  $5, 000,000  annually  and  requir- 
ing the  services  of  more  than  four  thousand  people ;  that  it 
created  a  lobby  and  bred  political  corruption;  that  it  pro- 
duced monopolies  and  was  unequal  in  its  incidence.  A  com- 
promise was  effected.  There  was  a  general  agreement  that 
certain  odds  and  ends  of  excise  might  be  sacrificed,  as 
follows  :  — 

Friction  matches $3,272,000 

Patent  medicines,  perfumery,  etc 1,978,000 

Bank  checks 2,318,000 

Bank  deposits       4,008,000 

Savings-bank  deposits 88,000 

Bank  capital 1,138,000 

Savings-bank  capital I5>ooo 

Total $12,817,000 

In  addition  the  national  banks  paid  into  the  treasury  #5,959,- 
000,  of  which  $5,521,000  was  on  deposits,  and  the  remainder 
on  capital. 

The  tax  on  bank  checks  was  declared  to  be  irritating  and 
hampering  in  its  nature  ;  the  tax  on  matches  was  on  a  house- 
hold article  of  hourly  and  necessary  consumption  by  all  classes ; 


420       Surplus  Revenue  and  Taxation.      [§  180 

the  tax  on  savings-bank  deposits  was  a  tax  on  thrift ;  the  tax 
on  patent  medicines  and  perfumeries  was  vexatious  because 
levied  on  innumerable  articles ;  and  the  taxes  on  the  capital 
and  deposits  of  banks  were  not  needed.  The  tax  on  national 
bank  circulation  was  regarded  in  a  different  light,  as  a  tax  on 
a  franchise  of  profit  to  a  favored  grantee. 

The  act  of  March  3,  1883,  abolished  the  above  taxes  and 
reduced  the  duties  on  tobacco  by  one-half.  The  loss  in  the 
total  revenue  was  not  so  great  as  anticipated,  as  there  was  a 
constant  gain  from  the  duties  on  spirits  and  fermented  liquors. 
In  1890  a  further  reduction  of  25  per  cent,  was  made  upon 
snuff,  chewing  and  smoking  tobacco,  and  the  special  license 
taxes  upon  the  sale  of  tobacco  were  repealed.  The  changes 
which  took  place  are  seen  in  the  following  table  in  millions  of 
dollars :  — 


Internal 

Revenue 

bv  Sources 

1880-1890 

Spirits 

Fermented 
liquors 

Tobacco 

Oleo- 

margarin 

Banks 

and 
bankers 

Adhe- 
sive 

stamps 

Total 

1880 

61.2 

12.8 

38.9 

3-4 

7-7 

124.0 

1881 

67.2 

13-7 

42-9 

3-8 

7-9 

135-3 

1882 

69.9 

16.2 

47-4 

5-3 

8.1 

1465 

1883 

74-4 

16.9 

42.1 

3-7 

7-7 

144-7 

1884 

76.9 

18.1 

26.1 

121. 6 

1885 

675 

18.2 

26.4 

112. 5 

1886 

69.1 

19.7 

27.9 

116. 8 

1887 

65.8 

21.9 

30.1 

0.7 

1188 

1888 

69-3 

23-3 

30.7 

0.9 

124.3 

1889 

74-3 

23-7 

3'-9 

0.9 

130.9 

1890 

81.7 

26.0 

34o 

0.8 

142.6 

180.    Tariff  Revision. 

A  general  reduction  of  customs  duties  was  not  so  easily 
effected.  A  revision  of  the  tariff  was  necessary  in  order  to 
meet  the  changed  conditions  of  trade ;  and  popular  favor 
greeted  the  suggestion  that  a  commission  be  appointed,  made 
up  of  leading  representatives  in  manufactures,  agriculture,  and 
commerce,  to  frame  a  tariff.     The  proposition  was  supported 


c   o 

<v    ^ 

E  5" 


§  180]  Tariff  Revision.  421 

alike  by  those  who  desired  expert  consideration,  and  by  those 
who  welcomed  any  delay  in  legislation.  A  commission  was 
consequently  authorized  by  Congress  in  1882  ;  the  method 
was  new  in  this  country,  and  indeed  unexampled  in  its  appli- 
cation to  the  principles  of  a  tariff  bill.  The  commission 
appointed  by  President  Arthur  as  a  whole  represented  high 
protectionist  views ;  but  the  members  recognized  in  their 
report  "  that  a  substantial  reduction  of  tariff  duties  was  de- 
manded, not  by  a  mere  indiscriminate  popular  clamor,  but  by 
the  best  conservative  opinion  of  the  country,  including  that 
which  has  in  former  times  been  most  strenuous  for  the  preser- 
vation of  our  national  industrial  defences."  In  spite  of  any 
temporary  inconvenience  a  reduction  was  regarded  by  the 
commission  as  conducive  to  prosperity.  The  average  reduc- 
tion recommended  was  from  20  to  25  per  cent. ;  it  applied 
to  commodities  of  necessary  general  consumption,  to  sugar 
and  molasses,  rather  than  to  luxuries,  and  to  raw  rather  than 
to  manufactured  materials. 

The  recommendations  of  the  commission  were  eventually 
treated  by  Congress  with  disapproval  if  not  with  contempt, 
as  is  frequently  the  case  with  expert  findings  in  a  democratic 
state.  The  more  radical  protectionists  secured  modifications 
along  lines  of  high  and  even  increased  protection.  The 
act  of  1883  was  the  most  important  revision  of  the  tariff 
since  the  Civil  War :  its  many  details  and  the  lack  of  any 
harmonious  principle  governing  its  rates  make  it  hard  to  sum- 
marize its  provisions  within  narrow  limits.  The  duties  were 
raised  on  certain  classes  of  woollen  goods,  especially  on  dress 
goods,  and  the  finer  grades  of  cloths  and  cassimeres  which 
were  then  commonly  imported ;  they  were  also  raised  on 
cotton  hosiery,  embroideries,  trimmings,  laces,  and  insertions, 
constituting  about  two-thirds  of  the  cottons  imported ;  they 
were  raised  on  iron  ore  and  certain  manufactures  of  steel. 
The  duties  were  reduced  on  the  finer  grades  of  wool,  on  the 
cheaper  grades  of  woollen  and  cotton  goods,  on  steel  rails, 
copper,  marble,  nickel,  and  barley.     "As  a  rule,"  according 


422       Surplus  Revenue  and  Taxation.     [§  180 

to  Taussig,  "  duties  were  advanced  on  protected  articles  of 
which  importations  continued  in  considerable  volume.  The 
advance  was  by  no  means  universal,  being  affected,  as  our 
tariff  legislation  so  often  has  been,  by  the  haphazard  manner 
in  which  the  details  of  the  measure  were  finally  settled.  But 
it  was  made  in  so  large  a  number  of  important  cases  as  to 
give  the  act  a  distinctive  protectionist  flavor." 

The  act  did  not  receive  general  commendation  even  from 
protectionist  supporters  of  the  Republican  party.  Secretary 
Folger  in  1883  referred  to  it  slightingly  and  suggested  the 
need  of  further  reduction  of  taxes.  John  Sherman  is  out- 
spoken in  his  criticism  of  the  act  of  1883,  and  the  comment 
he  makes  in  describing  the  forces  at  work  in  the  passage  of 
the  measure  may  well  serve  as  typical  of  conditions  too  often 
attending  tariff  legislation. 

"  When  the  bill  was  reported  to  the  Senate  it  was  met  with 
two  kinds  of  opposition,  —  one,  the  blind  party  opposition  of 
free-traders,  the  other,  the  conflict  of  selfish  and  local  inter- 
ests, mainly  on  the  part  of  manufacturers,  who  regarded  all 
articles  which  they  purchased  as  raw  material,  on  which  they 
wished  the  lowest  possible  rate  of  duty  or  none  at  all,  and 
their  work  as  the  finished  article,  on  which  they  wished  the 
highest  rate  of  duty.  .  .  .  The  Democratic  Senators  with  a 
few  exceptions  voted  steadily  and  blindly  for  any  reduction  of 
duty  proposed,  but  they  alone  could  not  carry  their  amend- 
ments, and  only  did  so  when  reinforced  by  Republican  Sen- 
ators, who,  influenced  by  local  interests,  could  reduce  any  duty 
at  their  pleasure.  In  this  way,  often  by  a  majority  of  one, 
amendments  were  adopted  that  destroyed  the  harmony  of  the 
bill.  .  .  .  This  local  and  selfish  appeal  was  the  great  defect  of 
the  bill."  1  Senator  Sherman  always  regretted  that  he  did  not 
defeat  the  bill,  by  voting  with  the  Democrats  against  the  adop- 
tion of  the  conference  report,  for  it  barely  passed  32  to  30.  It 
was  only  because  of  the  propriety  and  necessity  of  a  reduction 
of  internal  revenue  taxes  included  in  the  same  bill  that  he  felt 
1  Recollections,  vol.  ii,  p.  851. 


§  181]       Democratic  Tariff  Measures.  423 

justified  in  supporting  the  measure  on  its  final  passage.  The 
complaint  of  selfishness  and  illogical  vote  is  interesting  as 
coming  from  a  Senator  who  knew  something  about  local 
considerations.  Defeated  in  his  endeavors  to  protect  wool  at 
a  high  level  in  the  interest  of  his  Ohio  constituents,  Sherman 
was  himself  willing  to  seek  revenge  by  sacrificing  compensatory 
duties  on  worsteds,  and  thus  by  his  own  action  co-operate  to 
mar  the  harmony  of  the  bill. 

181.    Unsuccessful  Democratic  Tariff  Measures. 

The  tariff  of  1883  did  not  settle  the  problem  of  taxation: 
if  it  was  in  order  for  Secretary  Folger  to  suggest  the  possibility 
of  another  early  revision,  the  Democratic  party,  traditionally 
opposed  to  protection,  was  sure  to  continue  the  agitation  for 
lower  duties.  During  the  next  five  years  the  Democrats  were 
strong  enough  to  secure  the  consideration  of  two  general  tariff 
bills,  but  failed  to  enact  new  legislation.  The  "  Morrison 
horizontal"  bill  of  1884  proposed  an  average  reduction  of 
20  per  cent,  in  import  duties,  with  important  additions  to  the 
free  list.  The  principle  of  the  bill  never  gained  a  warm 
support ;  it  was  not  a  scientific  method  of  constructing  a 
tariff,  and  its  uniform  levelling  might  cause  unexpected  injury 
and  introduce  new  inequalities  as  troublesome  as  those  already 
said  to  exist.  Within  the  Democratic  party  a  protectionist 
wing,  led  by  Randall  of  Pennsylvania,  harassed  the  tariff 
reformers,  and  ultimately,  by  voting  with  the  Republicans, 
defeated  the  measure;  of  the  151  negative  votes  in  the  House 
on  the  Morrison  bill  41  were  Democratic. 

In  1885  a  Democratic,  administration  was  inaugurated  and 
both  the  president  and  Secretary  Manning  advocated  a  radical 
overhauling  of  the  tariff.  The  administration's  repeated  and 
vigorous  demands  tended  to  unite  the  Democratic  party  on 
this  question  and  to  eliminate  those  not  willing  to  yield  in- 
dividual interests  to  party  conviction.  In  December,  1887, 
President  Cleveland  startled  not  only  the  country  but  his  party 
by  confining  his  entire  message  to  the  existing  surplus  and  the 


424       Surplus  Revenue  and  Taxation.     [§  181 

need  of  tax  reform.  He  spoke  decisively,  if  not  over  passion- 
ately, of  the  diffusiveness  of  the  tariff  system ;  the  uselessness 
of  many  of  the  duties,  and  the  trifling  service  of  others,  and 
referred  to  the  tariff  as  illogical  and  inequitable.  "  Our  prog- 
ress towards  a  wise  conclusion  will  not  be  improved  by  dwell- 
ing upon  the  theories  of  protection  or  free  trade.  It  is  a 
condition  which  confronts  us,  not  a  theory."  With  special 
stress  he  advocated  free  raw  materials.  The  critics  of  the 
president  held  the  message  to  be  not  a  plea  for  reforming  a 
defective  tariff,  or  for  lopping  off  excrescences  or  incongruities, 
but  a  free-trade  document  designed  to  destroy  the  protective 
system.  The  Republican  majority  in  the  Senate  prepared  a 
new  and  strong  protectionist  tariff  measure  as  a  counter- 
challenge.  Under  severe  pressure  the  Democratic  House 
passed  the  Mills  bill  with  only  four  dissenting  votes  in  the 
party. 

The  Republican  taunt  that  the  Democrats  were  not  sincere 
in  their  arraignment  of  the  tariff  had  some  ground ;  the  Dem- 
ocrats had  been  in  control  of  the  House  of  Representatives 
from  1875  to  1 88 1  and  from  1883  to  1888,  and  yet  had  never 
agreed  on  well-defined  opinions  in  regard  to  import  duties. 
After  the  Civil  War  the  platforms  of  the  Democratic  party 
lacked  clear  and  positive  convictions  as  to  a  tariff  policy. 
In  1868  the  party  demanded  a  tariff  for  revenue  which  would 
afford  incidental  protection  to  domestic  manufactures ;  in 
1876  and  1880,  that  custom-house  taxation  shall  be  only  for 
revenue  ;  in  1 884,  that  any  change  of  law  must  at  every  step 
be  regardful  of  the  labor  and  capital  involved  in  industries ; 
and  in  1888  they  repeated  the  same  proposition.  The  Dem- 
ocratic party  during  this  period  seemed  concerned  with  the 
details  of  schedules  rather  than  with  fundamental  principles, 
and  consequently  the  issue  did  not  arouse  any  popular 
enthusiasm  in  political  campaigns.  Even  the  reform  message 
of  Cleveland  was  delayed  until  the  latter  part  of  his  term,  and 
the  continued  clashing  within  the  Democratic  party  was  well 
illustrated  in  the  closing  days  of  the  Cleveland  administration. 


§  181]       Democratic  Tariff  Measures.  425 

After  the  Mills  bill  was  brought  forward  Randall  proposed  a 
protectionist  tariff  bill  for  the  reduction  of  revenue  by 
$95,000,000,  of  which  $75,000,000  would  come  from  cuts  in 
the  internal  revenue  ;  and  later  with  the  aid  of  more  than  a 
score  of  Democrats  he  secured  the  reference  of  a  bill  for  the 
abolition  of  all  taxes  on  tobacco  to  the  committee  of  appropria- 
tions, of  which  he  was  chairman,  thus  turning  it  away  from  the 
committee  on  ways  and  means,  to  which  it  more  properly 
belonged. 

The  Republican  party  was  now  united.  From  the  first,  it 
had  on  the  whole  legislated  consistently  in  favor  of  protection 
to  domestic  industries,  although  only  gradually  did  it  accept 
this  doctrine  as  a  supreme  test  of  party  allegiance.  In  the 
platforms  of  1872,  1876,  and  1880,  it  cautiously  declared  that 
the  import  duties  should  be  so  adjusted  as  to  aid  in  securing 
remunerative  wages  to  labor,  and  to  protect  the  industries, 
prosperity,  and  growth  of  the  whole  country;  in  1884  it 
more  frankly  demanded  that  import  duties  should  not  be 
for  revenue  only,  but  should  afford  security  to  our  diversified 
industries  and  "  protection  "  to  the  rights  and  wages  of  the 
laborer;  in  1888  it  was  more  uncompromisingly  in  favor 
of  the  American  system  of  protection.  It  was  on  this  issue 
that  the  presidential  campaign  of  1888  was  definitely  fought 
out.  The  Republicans  won  the  presidency,  and  in  1889, 
when  the  new  House  of  Representatives  was  organized, 
prepared  to  carry  out  their  pledges  in  the  construction  of 
a  new  tariff,  designed  at  the  same  time  to  reduce  revenue 
and  afford  protection. 

The  customs  receipts,  grouped  according  to  some  of  their 
principal  sources,  will  be  found  in  the  Appendix.  There  were 
no  marked  fluctuations  during  this  decade  except  a  slight 
decline  caused  by  the  depression  of  1884. 

The  total  receipts,  1 880-1 890,  from  all  sources  were  as 
follows :  — 


426       Surplus  Revenue  and  Taxation.      [§  182 


Customs  revenue 

Internal  revenue 

Other 

Total  net 
ordinary 

1880 

$186,522,000 

$  1 24,009,000 

$22,995,000 

$333,526,000 

1881 

198.159,000 

135.264,000 

27,359,000 

360,782,000 

1882 

220,410,000 

146,497,000 

36,618,000 

403,525,000 

1883 

214,706,000 

144,720,000 

38,861,000 

398,287,000 

1884 

195,067,000 

121,586,000 

31,866,000 

348,519,000 

188s 

181,471,000 

112,498,000 

29,721,000 

323,690,000 

1886 

192,905,000 

116,805,000 

26,729,000 

336,439-ooo 

1887 

217,286,000 

118,823,000 

35,294,000 

371,403,000 

1888 

219,091,000 

124,296,000 

35,879,000 

379  266,000 

1889 

223,832,000 

130,881,000 

32,337,000 

387,050,000 

1890 

229,668,000 

142,606,000 

30,806,000 

403,080,000 

182.    Increased  Expenditures. 

The  existence  of  large  surplus  funds  in  the  treasury  gave 
rise  to  many  propositions  for  increased  expenditures.  Some 
of  these  were  undoubtedly  urged  solely  for  selfish  and  partisan 
ends  or  as  an  easy  way  of  temporizing  with  the  revenue  ques- 
tion. A  few  argued  that  money  was  lying  dead  in  the  treasury 
and  that  it  was  a  duty  for  Congress  to  put  this  dead  money 
into  circulation ;  even  distribution  was  again  proposed.  Other 
projects,  however,  were  advocated  in  good  faith  in  the  belief 
that  the  government,  with  the  enlarged  sense  of  nationality 
developed  by  the  results  of  the  Civil  War,  now  had  oppor- 
tunities and  even  duties  to  perform  for  fuller  enjoyment  of  its 
expanding  life.  Among  the  measures  requiring  greater  ex- 
penditures were  successive  river  and  harbor  bills.  Although 
these  improvements  did  not  receive  all  that  was  asked  for, 
generous  provision  was  made  in  comparison  with  previous 
appropriations.  In  1882  President  Arthur  vetoed  a  river  and 
harbor  bill  authorizing  the  expenditure  of  $18,743,875,  on  the 
ground  that  the  amount  called  for  was  extravagant  and  be- 
cause appropriations  were  made  for  purposes  not  for  the 
common  defence  or  general  welfare  and  which  did  not  pro- 
mote commerce  between  the  States ;  and  this  attitude  for  'a 
brief  period  held  appropriations  in  check.  Expenditures  by 
years  for  rivers  and  harbors  were  as  follows  in  millions  of 
dollars :  — 


182] 


Increased  Expenditures. 


427 


Expenditures  for  Rivers  and  Harbors 

1880 

8.0 

1886 

4-x 

1 881 

8.S 

1887 

7.8 

1882 

1 1.4 

1888 

7.0 

1883 

•  3-6 

1889 

11. 2 

1884 

8.2 

1890 

11.7 

1885 

10.5 

The  defence  of  the  sea-coast  was  also  pressed  on  the  ground 
that  existing  guns,  forts,  and  ships  were  worthless.  While  the 
United  States,  wearied  with  war,  had  devoted  its  energies  to 
internal  transportation  and  to  the  payment  of  the  war  debt, 
other  nations  had  been  experimenting  with  coast  defences, 
projectiles,  explosives,  armies,  and  new  types  of  vessels.  Large 
sums  were  claimed  for  the  restoration  of  the  merchant  marine 
by  bounties  and  subsidies,  and  for  the  construction  of  govern- 
ment public  buildings  to  take  the  place  of  those  rented. 
Further  relief  was  asked  for  the  veterans  of  the  Union  army, 
and  a  pension  bill  was  pushed,  granting  pensions  to  sol- 
diers and  sailors  who  had  served  in  the  Civil  War,  if  they 
were  no  longer  able  to  support  themselves ;  although  vetoed  by 
Cleveland  in  1887,  it  attracted  a  large  and  popular  support. 
Through  several  sessions  of  Congress  debates  were  devoted  to 
more  rapid  surveys  of  public  lands,  irrigation  of  the  Western 
deserts,  the  construction  of  the  Nicaraguan  canal,  and  the 
so-called  Blair  educational  bill  providing  for  the  distribution 
of  large  funds  to  the  several  States  for  educational  purposes. 
A  bill  was  also  passed  in  1889,  but  vetoed  by  Cleveland, 
providing  for  the  repayment  of  the  direct  tax  collected  under 
the  act  of  1861.  This  alone  would  have  relieved  the  treasury 
of  at  least  §15,000,000,  or  if  the  percentage  allowed  for  col- 
lecting the  tax  be  included,  of  over  $17,000,000. 

The  political  philosophy  which  inspired  these  generous 
plans  is  well  summed  up  in  an  appeal  made  by  Senator  Dolph 
of  Oregon  in  the  course  of  a  debate  in  1 88  7  :  "  In  short, 
if  we  were  to  take  our   hands  off  the  increasing  surplus  in 


428       Surplus  Revenue  and  Taxation.      [§  182 

the  treasury,  and  stop  bemoaning  the  prosperity  of  the  country 
and  trying  to  make  the  people  dissatisfied  with  the  alleged 
burden  of  taxation  which  they  do  not  feel;  and  devote  our 
energies  to  the  development  of  the  great  resources  which  the 
Almighty  has  placed  in  our  hands,  to  increasing  the  products 
of  our  manufactories,  of  our  shops,  of  our  mines,  and  of  our 
forests ;  and  to  cheapen  transportation  by  the  improvement 
of  our  rivers  and  harbors  and  restoring  our  foreign  commerce, 
we  would  act  more  wisely  than  we  do." 

Only  a  few  of  the  projects  just  outlined  secured  final  ap- 
proval in  Congress.  The  most  notable  increase  in  expendi- 
ture was  for  pensions;  before  1880,  the  largest  expenditure 
for  this  purpose  in  any  one  year  had  been  but  $35,000,000, 
—  after  that  it  was  never  less  than  $50,000,000;  and  in 
1886  the  beginning  of  a  steady  upward  climb  was  made, 
reaching  $106,936,813  in  1890  and  $159,357,558  in  1893. 
Some  slight  increase  was  made  for  the  navy  beginning  in 
1889,  but  the  more  liberal  expenditures  for  this  branch  of 
the  public  service  did  not  swell  the  budget  until  the  next 
decade. 

The  total  expenditures  by  years,  1 880-1 890,  were  as 
follows  :  — 


8go 


War 


$38,116, 
40,466, 

43,57° 
48,911, 

39.429; 
42,670, 
34.3*4. 
38,56'. 
38.522. 
44,435 
44,S82; 


Navy 


#13,536,000 
1 5, 686,000 
15.032,000 
15,283,000 
17,292,000 
16,021,000 
13,907,000 
15,141,000 
16,926,000 
21,378,000 
23,006,000 


Indians 


$5,945,030 
6,514,000 
9,736,000 
7,362,000 
6,475,000 
6,552,000 
6,099,000 
6,194,000 
6,249,000 
6,892,000 
6,708,000 


Pensions 


#56,777.°°o 
50,059,000 
61,345,000 
66,012,000 
55,429,000 
56,102,000 
63,404,000 
75,029,000 
80,288,000 
87,624,000 

106,936,000 


Interest 

on  public 

debt 


$95,757,000 
82,508,000 
71,077,000 
59,160,000 
54,578,000 
51,386,000 
50,580,000 
47,741,000 
44,715,000 
41,001,000 
36,099,000 


Miscel- 
laneous 


$54,713,000 
64,416,000 
57,219,000 
68,678,000 
70,920,000 
87,494.000 
74,166,000 
85,264,000 
72,952,000 
80,664,000 
81,403,000 


Total 


$264,847,000 
259,650,000 
257,981,000 
265,408,000 
244,125,000 
260,220,000 
242,482,000 
267,931.000 
259,653.000 
281,096,000 
297,736,000 


The  principal  items  included  under  "  Miscellaneous  "  are 
tabulated  in  a  table  to  be  found  in  the  Appendix. 


$25,000000  t 
0        d 


INDIANS 


!  200,000000  - 


150,000000 


100,000000  - 


50,000000  - 


- 

r^ 

WAR 

1      ' 

1 

1 

§50,000000 


NAVY 

1 " 

$50,000000 


INTEREST 


$1 50,000000  f- 
100,000000 


$50,000000 


PENSIONS                    A 

— 

MISCELLANEOUS 

00,000000  L_                                                                     J 

50,000000 

0 

1881 


1890 


No.    XII.  — ORDINARY   EXPENDITURES,    1881-1901. 
(Continuation  of  Chart  No.  8,  same  scale.) 


§  183]        Treasury  Purchase  of  Bonds.         429 

A  comparison  of  receipts  and  expenditures,  with  the  sur- 
pluses annually  accruing,  is  shown  as  follows  in  millions  of 
dollars  :  — 


Rhckipts 

Expenditures 

Surplus 

Taxes 

Other 

Total 

1880 

310.S 

23.0 

3335 

264.8 

68.7 

1881 

333-4 

»7-4 

360.8 

259.6 

IOI.J 

1882 

367.1 

36.4 

403.5 

*57-9 

145-6 

1883 

359-5 

38.8 

3983 

265.4 

1329 

1884 

316.7 

31.8 

3485 

244.1 

104.4 

1885 

*93-9 

298 

323-7 

260.2 

63.5 

1886 

309.8 

26.6 

3364 

»4»S 

93-9 

1887 

336.1 

35-3 

371-4 

267.9 

103.5 

1888 

343-4 

35-9 

379-3 

259.6 

"97 

.889 

354-7 

3*-4 

387-1 

282.0 

105. 1 

1890 

37*-3 

30.8 

403.1 

"97-7 

K>5-4 

183.    Treasury  Purchase  of  Bonds. 

It  has  already  been  stated  that  the  funding  act  of  1870  tied 
up  a  large  portion  of  the  public  indebtedness  in  a  4  per 
cent,  thirty-year  bond.  Owing  to  the  financial  disturbances 
occasioned  by  the  Franco- Prussian  War  and  the  panic  of  1873, 
the  placing  of  these  bonds  was  not  effected  until  1877,  which 
made  the  new  issue  irredeemable  before  1907,  save  through 
purchase  in  the  open  market.  The  4^  per  cent,  fifteen-year 
bonds  issued  in  1876,  were  not  redeemable  until  1891.  When 
the  surplus  appeared  in  1882  there  was  no  immediate  embar- 
rassment, as  over  $400,000,000  of  3  per  cent,  and  3^  per 
cent,  bonds,  temporarily  issued  in  exchange  for  the  5  per 
cent,  bonds  which  came  due  in  1881,  were  redeemable  at  the 
pleasure  of  the  government ;  three  successive  surpluses  of  equal 
amounts  would  cancel  the  outstanding  debt.  In  1886  this 
opportunity  for  relief  was  exhausted  ;  practically  all  the  bonds 
subject  to  redemption  at  the  option  of  the  government  had 
been  cancelled,  and  Secretary  Fairchild  in  1887  questioned 
whether  he  had  power  under  the  law  to  buy  bonds  beyond 
the   sinking-fund    requirements.      The    dispute    turned    on   a 


430        Surplus  Revenue  and  Taxation.     [§  183 

clause  in  an  appropriation  act  of  March  3,  1881,  empowering 
the  secretary  of  the  treasury  to  apply  the  surplus  money  in  the 
treasury  to  the  purchase  and  cancellation  of  bonds  ;  the  admin- 
istration construed  this  as  a  power  which  lapsed  with  this 
particular  appropriation  bill,  and  it  placed  the  responsibility 
upon  the  legislative  branch  by  asking  for  definite  authority. 
This  was  not  granted,  and  the  secretary  at  first  refused  to 
purchase  bonds  in  excess  of  the  requirements  of  the  sinking 
fund ;  and  to  buy  even  this  latter  amount  involved  difficulty. 
At  best  the  purchase  of  bonds  depended  upon  the  frame  of 
mind  of  bondholders ;  and  every  proposition  to  purchase 
appreciated  the  price  of  securities,  while  the  subsequent  hig- 
gling over  terms  necessary  to  protect  the  interests  of  the 
government  kept  alive  the  commercial  suspense  as  to  whether 
the  money  market  at  a  given  time  would  be  relieved.  A 
striking  instance  of  this  bargaining  took  place  in  the  summer 
of  1887,  when  the  secretary  called  for  offers;  4^  per  cent, 
bonds  ran  up  from  109  to  in,  and  most  of  the  tenders  were 
above  no.  The  next  week  bondholders  recognized  the  stand 
taken  by  the  treasury,  and  lowered  their  demands  to  no,  but 
no  acceptances  were  made  higher  than  109^.  This  firm- 
ness again  led  to  offers  varying  from  io6)4   to  109. 

The  cost  of  redemption  of  public  indebtedness  is  seen 
in  the  following  table  giving  the  prices  of  the  two  principal 
issues  of  bonds  during  the  period  1 880-1 890  (fractions  dis- 
carded) :  — 


Year 

Four  and  one-half 

Four  per  cents, 
of  1907 

per  cents,  of  1891 

1880 

106-112 

103-113 

1881 

111-116 

112-118 

1882 

1 1 2- 1 16 

117-121 

»S83 

112-115 

118-125 

1884 

110-114 

118-124 

188s 

112-113 

121-124 

1886 

110-114 

123-129 

1887 

107-110 

124-129 

1888 

106-109 

125-130 

1889 

104-109 

126-129 

1890 

102-105 

122-126 

i 

/ 
/ 

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/ 
/ 
/ 
/ 

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1 

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\ 
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L  -   -     h 

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§  i»4]      The  Public  Debt,  1 880-1 890.        431 

In  1888  the  secretary  stated  that  many  offerings  of  bonds 
had  been  declined  because  the  price  was  thought  to  be  too 
high,  but  finally  almost  all  the  bonds  offered  were  bought  at 
some  price.  In  that  year  $94,000,000  of  bonds  were  secured 
at  a  cost  of  $112,000,000.  The  purchases  continued  through 
1889  and  1890,  the  treasury  changing  its  terms  of  purchase 
as  the  market  warranted.  Although  the  several  secretaries 
of  the  treasury  during  this  era  of  abundant  revenues  preferred 
reduction  of  taxation  to  the  payment  of  the  debt  under  the 
onerous  conditions  imposed,  they  found  consolation  in  reckon- 
ings which  showed  a  final  saving  to  the  people  by  the  stoppage 
of  interest  payment  on  debt  cancelled.  For  example,  Secre- 
tary Windom  in  1890  calculated  that  as  a  result  of  purchase 
and  redemption  of  bonds,  the  reduction  in  the  annual  interest 
charge  amounted  to  nearly  $9,000,000,  and  the  total  saving 
of  interest  to  $51,576,000.  On  the  other  hand,  as  explained 
by  a  previous  secretary,  Fairchild,  the  people  lost  the  use  in 
business  of  the  money  devoted  to  the  purchase  of  bonds  taken 
from  them,  by  continued  high  taxation ;  so  far  as  this  use  of 
money  in  business  was  more  important  than  its  use  when 
saved  by  the  cancellation  of  bonds,  the  people  lost  by  the 
transaction.  In  all,  the  net  public  indebtedness  was  reduced 
from  $1,996,000,000  in  1879  to  $891,000,000  in  1890,  —  a 
debt  extinguishment  without  parallel  in  the  history  of  any 
nation.  For  the  treasury  it  meant  a  reduction  of  interest  on 
the  debt  from  $105,000,000  in  1879  to  $36,000,000  in  1890. 


184.    The  Public  Debt,  1880-1890. 

The  annual  changes  in  the  character  of  the  debt  are  shown 
in  detail  in  the  table  on  the  following  page.  The  old  war 
loans  disappeared  and  the  5  per  cent,  loan  created  under  the 
funding  act  of  1870,  which  fell  due  in  1881  and  continued 
on  indefinite  terms  for  a  few  years  at  3^  and  3  per 
cent,  interest,  was  extinguished  in  1887.  With  the  intro- 
duction of  certificate  forms  of  money,  as  of  gold  certificates  in 


432       Surplus  Revenue  and  Taxation.      [§  184 


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§  184]      The  Public  Debt,  1  880-1 890.        433 

1863,  currency  certificates  in  1872,, and  silver  certificates  in 
1878,  the  public  debt  tables  become  misleading  unless  care- 
fully analyzed.  Against  certificates  the  treasury  carries  corre- 
spondingly large  amounts  of  cash  ;  and  the  true  liabilities  of 
the  treasury  are  determined  by  subtracting  from  the  total 
indebtedness  the  item  "  cash  in  the  treasury,"  which  includes 
the  gold,  silver,  or  United  States  notes  held  in  pledge  for  the 
certificates. 


CHAPTER   XIX. 
SILVER   AND   THE   TARIFF,   1890-1897. 

185.    References. 

Silver  Legislation:  Messages  and  Papers,  IX,  40-41  (1889),  113- 
114  (1890),  193-195  (1891),  401-405  (Cleveland,  special  message,  Aug. 
8, 1893),  444,  483-489, 653-655  (1895) ;  Pittance  Report,  1889,  pp.  lx-lxxxiv 
(Windom's  recommendation);  1890,  pp.  xlvii-1 ;  F.  W.  Taussig,  The 
Silver  Situation,  48-71  (act  of  1890);  A.  D.  Noyes,  Thirty  Years  of 
American  Finance,  138-152  (act  of  1890);  D.  K.  Watson,  History  of 
American  Coinage,  179-191  (Sherman  act  of  1890),  192-201  (repeal); 
Report  of  Monetary  Commission,  (1898),  259-265  (act  of  1890),  266-280 
(repeal);  J.  Sherman,  Recollections,  II,  1061-1071  (act  of  1890),  1175- 
1200  (repeal);  R.   F.  Hoxie,  Debate  of  1890,  in  Jour.   Pol.   Econ.,   I, 

535-587. 

Free  Coinage:  W.  H.  Harvey,  Coin's  Financial  School  (Chicago, 
1894);  R.  P.  Bland,  in  No.  Amer.  Rev.,  CLI  (1890),  344-353;  D.  W. 
Voorhees,  ditto,  CLIII  (1891),  524-535;  W.  M.  Stewart,  ditto,  CLIV 
(1892),  552-561;  R.  P.  Bland,  ditto,  CLVIII  (1894),  554-562;  W.  J. 
Bryan,  ditto,  CLXIII  (1896),  703-710;  A  J.  Warner,  Arena,  VIII  (1893), 
547;  W.  M.  Stewart,  Forum,  XI  (1891),  429-437;  R.  P.  Bland,  ditto, 
XIII  (1892),  45-52  ;  W.  H.  Harvey,  ditto,  XIX  (1895),  405~4°9- 

Opposition  to  Free  Coinage  :  F.  W.  Taussig,  The  Silver  Situation 
in  the  U.  S.,  in  Quar.Jour.  Econ.,  IV  (1890),  291-315;  H.  White,  ditto, 
397-407 ;  F.  A.  Walker,  Jour.  Pol.  Econ.,  I,  163-178;  J.  Sherman,  Bank- 
ers' Magazine,  XLV  (1891),  608-617;  J.  J.  Knox,  ditto,  617-622;  W.  P. 
St.  John,  ditto,  887-898;  J.  Seligman,  in  No.  Amer.  Rev.,  CLII  (1891), 
204-208;  E.  O.  Leech,  ditto,  299-310;  E.  O.  Leech,  ditto,  CLVII 
(1893),  42-51 ;  J-  H.  Eckels,  ditto,  129-239;  Forum,  XI  (1891),  10-18; 
XII(i89i),  472-476,611-613,  772-782;  XIII  (1892),  34-44,  281-294, 
439-450. 

Gold  Reserve:  Messages  and  Papers,  IX,  561-565  (Jan.,  1895),  642- 
651  (Dec,  1895);  Pittance  Report,  1891,  pp.  10-15  (report  of  treasurer); 
1892,  pp.  xxviii-xxix,  9-19;  1893,  PP-  9~l3'<  *894,  pp.  lxviii-lxxv,  5-11; 
1895,  pp.  lxvi-lxxxii;  1896,  pp.  lxxi-lxxviii,  6-7;  Report  of  Monetary 
Commission  (1898),  430-444;  A.  D.  Noyes,  Thirty  Years  of  American 
Finance,  150-181  ;  W.  C.  Ford,  Movement  of  Gold  and  Foreign  Exchanges, 
1894-1895,  in  Yale  Review,  IV  (1895),  128;  also  in  Sound  Currency,  II, 
No.  22;  F.  Fetter,  in  Pol.  Sci.  Quar.,  XI  (1896),  237-247  ;  F.  W.  Taussig, 

434 


§185]  References.  435 

Treasury  Condition  in  1894-1896,  in  Quar.  Jour.  Econ.,  XIII  (1899), 
204-218. 

Panic  of  1893:  Report  of  Monetary  Commission  (1898),  219-223;  A. 
D.  Noyes,  Thirty  Years  of  American  Finance,  182-206 ;  or  in  Pol.  Sci. 
Quar.,  IX  (1894),  12-30;  C.  A.  Conant,  History  of  Modern  Banking, 
524-554;  J.  D.  Warner,  Currency  Famine  of  1893,  in  Sound  Currency, 
II,  No.  6  (copies  of  clearing-house  certificates,  etc.). 

Sale  of  Bonds  :  Messages  and  Papers,  IX,  567-568  (Feb.  8,  1895  )  ; 
Finance  Report,  1893,  pp.  lxix-lxxiv ;  1894,  p.  xxxiii ;  1895,  PP'  lxix-lxxii ; 
Investigation  of  the  Sale  of  Bonds,  Pub.  Doc,  54th  Cong.,  2d  sess.,  Sen. 
Doc,  187  (1896),  p.  332;  A.  D.  Noyes,  Thirty  Years  of  American  Finance, 
207-223,  234-254 ;  A.  D.  Noyes,  The  Late  Bond  Syndicate  Contract,  in 
Pol.  Sci.  Quar.,  X,  1895,  573-°°2;  C.  A.  Conant,  History  of  Modern 
Banking,  544-551 ;  B.  Ives,  Government  and  the  Bond  Syndicate,  in  Yale 
Review,  IV,  10-22. 

Banking  and  Currency:  Messages  and  Papers,  IX,  554-556  (1894) ; 
Finance  Report,  1894,  pp.  lxxviii-lxxxi  (Carlisle),  393-398  (Eckels) ;  1895, 
pp.  lxxxii-lxxxv  (Carlisle),  376-378  (Eckels) ;  1896,  pp.  498-506  (Eckels) ; 
A.  L.  Ripley,  Two  Plans  for  Currency  Reform,  in  Yale  Review,  VII 
(1898),  50-71;  J.  L.  Laughlin,  Baltimore  Plan  of  Bank  Issues,  in  Jour. 
Pol.  Econ.,  Ill  (1894),  101-105  ;  Report  of  Monetary  Commission  (1898), 
20-75,  23l~2j6>  260-276;  J.  F.  Johnson,  Report  of  Monetary  Commission, 
in  Annals  Amer.  Acad.,  XI,  191-224;  F.  A.  Cleveland,  Report  of  Mone- 
tary Cotnmission,  in  Annals  Amer.  Acad.,  XIII,  31-56;  C.  A.  Conant, 
History  of  Modern  Banking,  377-385 ;  C.  N.  Fowler,  Financial  and  Cur- 
rency Reform,  in  Forum,  XXII  (1897),  713;  H.  White,  Money  and  Bank- 
ing (revised  ed. ),  417-456. 

Tariff:  Messages  and  Papers,  IX,  121-122  (1890),  191-193  (1891), 
309-311  (1892),  552  (1894),  741-743  (1896);  Finance  Report,  1889,  pp. 
xxx-xxxii ;  F.  W.  Taussig,  History  of  the  Tariff,  251-283  (tariff  of  1890), 
284-320  (tariff  of  1894) ;  F.  W.  Taussig,  Tariff  Act  of  1894,  in  Pol. 
Sci.  Quar.,  IX  (1894),  584-609;  William  Hill,  Comparison  of  Votes  on 
McKinley  and  Wilson  Bills,  in  Jour.  Pol.  Econ.,  II,  290;  J.  Sherman, 
Recollections,  II,  1201-1208  (tariff  of  1894);  A.  D.  Noyes,  Thirty  Years 
of  American  Finance,  223-233;  Stanwood,  II,  243-358. 

Income  Tax:  Finance  Report,  1895,  PP-  481-483;  J.  M.  Gould  and 
G.  F.  Tucker,  Federal  Income  Tax  Explained  (1894) ;  F.  C.  Howe,  U.  S. 
under  the  Internal  Revenue  System,  233-252 ;  W.  M.  Daniels,  Public 
Finance,  196-206;  George  Tunell,  Legislative  History  of  the  Second  Income 
Tax,  in  Jour.  Pol.  Econ.,  Ill  (1895),  3II-337!  E.  R.  A.  Seligman,  in 
Pol.  Sci.  Quar.,  IX  (1894),  621-648;  Economic  Journal,  IV  (1894),  639- 
667;  Forum,  XIX  (1895),  48-56;  C.  F.  Dunbar,  in  Quar.  Jour.  Econ., 
IX,  26-46;  A.  C.  Miller,  in  Jour.  Pol.  Econ.,  Ill,  255;  J.  K.  Beach, 
Income  Tax  Decision,  in  Yale  Review,  V,  58-75;  C.  G.  Tiedman,  Consti- 
tutionality of  the  Income  Tax,  in  Annals  of  Amer.  Acad.,  VI,  268-279  > 
A.  Abbott,  Bankers'  Magazine,  L  (1894),  185  ;  Poole's  Index,  IV,  277-278 
(references). 


436 


Silver  and  the  Tariff.  [§  186 


Sugar  Bounty:  Finance  Report,  1892,  pp.  454-470;  1893,  P-  643! 
1894,  p.  706;  1895,  pp.  478-481 ;  1897,  p.  611  ;  H.  C.  Beach,  in  Amer. 
Law  Review,  XXIX,  801. 

Reciprocity:  Messages  and  Papers,  IX,  123  (1890),  141  (treaty  with 
Brazil),  148  (Cuba),  152  (Dominican  Republic),  et  seq. ;  F.  W.  Taussig, 
in  Quar.  Jour.  Econ.,  VII  (1892),  26-39;  W.  L.  Wilson,  Forum,  XIV 
(1892),  255-264. 

186.    Silver  Act  of  1890. 

In  1890  the  subject  of  silver  coinage  came  up  in  an  unex- 
pected form,  and  for  eight  years  was  the  most  serious  financial 
and  political  problem.  No  special  prominence  had  been  given 
to  this  question  in  the  presidential  campaign  of  1888.  Mr. 
Windom,  secretary  of  the  treasury,  however,  in  his  first  report, 
December,  1889,  surprised  the  country  with  a  novel  plan  for 
the  utilization  of  silver ;  even  the  president  declared  that  he 
had  "been  able  to  give  only  a  hasty  examination  to  the  plan, 
owing  to  the  fact  that  it  had  been  so  recently  formulated." 
Windom  had  formerly  served  as  secretary  of  the  treasury  for 
a  few  months  under  Garfield  and  afterward  as  senator  from 
Minnesota ;  he  was  generally  recognized  as  a  shrewd  politician, 
familiar  with  the  temper  of  the  West  on  the  currency  question. 
Six  Northwestern  States  had  recently  been  created,  and  as  the 
silver  sentiment  was  very  strong  in  these  new  communities, 
the  advocates  of  free  coinage  of  silver  gained  a  dispropor- 
tionate strength  in  the  Senate ;  and,  though  the  senators  from 
these  States  were  Republican  on  leading  party  issues,  they 
were  willing  to  hold  up  general  legislation  in  order  to  secure  a 
currency  to  their  minds ;  it  was  even  understood  that  no  tariff 
bill  could  be  passed  without  concessions  to  the  silver  party. 

Windom's  detailed  discussion  of  the  silver  question  is  a 
useful  compendium  of  the  arguments  for  silver  coinage  ad- 
vanced by  various  classes  of  bimetallists.  The  solutions  pro- 
posed are  summarized  as  follows  : 

1.  A  ratio  between  gold  and  silver  fixed  by  international 
agreement ;  the  mints  of  the  leading  nations  of  the  world  to 
be  open  to  the  free  coinage  of  both  metals. 


§  186]  Silver  Act  of  1890.  437 

2.  Continuance  of  the  policy  of  the  Bland  Act  of  1878. 

3.  Increase  of  the  purchases  and  coinage  of  silver  to  the 
maximum  of  $4,000,000  per  month  authorized  by  that  law. 

4.  Free  coinage  of  standard  silver  dollars. 

5.  Coinage  of  silver  dollars  containing  a  dollar's  worth  of 
bullion. 

6.  Issue  of  certificates  to  depositors  of  silver  bullion  at  the 
rate  of  one  dollar  per  412^  grains  of  standard  silver. 

All  of  these  propositions  were  dismissed  by  Windom  either 
as  impracticable,  inadvisable,  or  inferior  in  weight  to  his  own 
plan.  In  brief,  he  recommended  the  issue  of  treasury  notes 
against  the  deposit  of  silver  bullion,  at  the  market  price  of  the 
silver  when  deposited ;  the  notes  to  be  redeemable  in  either 
gold  or  in  silver  at  the  current  market  rate  at  the  time  of 
payment.  As  this  plan  was  not  accepted,  it  is  unnecessary 
to  discuss  it  further.  The  bill  which  finally  passed,  July  14, 
1890,  authorized  the  secretary  of  the  treasury  to  purchase 
4,500,000  ounces  of  silver  bullion  each  month  and  to  issue 
in  payment  thereof  treasury  notes  of  full  legal  tender.  The 
essential  differences  between  this  act  and  that  of  1878  were  : 
increase  in  the  monthly  purchase  of  silver ;  treasury  notes  to 
be  full  instead  of  partial  legal  tender,  as  in  the  case  of  the 
silver  certificates ;  redemption  of  treasury  notes  either  in  gold 
or  silver  coin  at  the  discretion  of  the  secretary.  After  July 
1,  1 89 1,  standard  silver  dollars  were  to  be  coined  only  when 
necessary  for  the  redemption  of  the  notes. 

On  the  whole,  the  measure  provided  for  the  purchase  of 
all  the  American  product  of  silver,  but  did  not  admit  unlim- 
ited coinage.  In  order  to  reassure  those  who  feared  that  such 
large  purchases  would  result  in  depreciation  of  the  standard, 
the  act  declared  that  it  was  the  established  policy  of  the  United 
States  to  maintain  the  two  metals  on  a  parity  with  each  other. 
This  was  afterwards  interpreted  by  the  treasury  as  "  a  virtual 
promise  that  the  notes  shall  always  be  redeemed  in  gold  or  its 
exact  equivalent."  Although  an  increase  of  silver  purchases 
is  apparently  required  by  the  Sherman  Act  as  compared  with 


438  Silver  and  the  Tariff.  [§  187 

the  Bland  Act,  this  would  not  necessarily  follow ;  for  by  the 
act  of  1890  the  annual  additions  to  the  currency  would  grow 
less  if  the  price  of  silver  fell,  while  by  the  Bland  Act  the 
annual  additions  grew  larger  as  the  price  of  silver  fell.  For 
substituting  the  measurement  of  purchases  by  ounces  instead 
of  by  dollars,  Senator  Sherman  has  the  credit,  and  its  impor- 
tance becomes  obvious  in  view  of  the  subsequent  fall  in  the 
value  of  silver. 

187.    McKinley  Tariff  of  1890. 

Closely  following  the  silver-purchasing  law  was  the  enact- 
ment of  a  new  tariff,  October  i,  1890,  in  order  to  fulfil  the 
election  promises  of  the  Republican  party  in  1888.  The 
Senate  bill  of  1888  was  brought  forward  and  served  as  the 
basis  of  the  measure  which  was  reported.  As  Mr.  McKinley 
of  Ohio  was  chairman  of  the  House  committee  on  ways  and 
means,  the  act  according  to  custom  is  popularly  known  by 
his  name.  The  title  of  the  long  and  detailed  act  reads  :  "  An 
act  to  reduce  the  revenue  and  equalize  duties  on  imports,  and 
for  other  purposes."  The  justification  of  any  such  character- 
ization lay  in  the  repeal  of  the  raw  sugar  duties ;  in  the  reduc- 
tion of  duties  on  steel  rails,  iron,  and  steel  plates,  and  on 
structural  iron  and  steel ;  and  in  an  increase  of  the  free  list 
embracing  a  number  of  articles  of  no  great  commercial  impor- 
tance. Throughout  the  debate  the  protectionist  philosophy 
was  developed  to  a  point  hitherto  unknown  in  tariff  discussion. 
Restrictive  duties  were  no  longer  regarded  as  a  temporary 
stage  in  the  arduous  journey  toward  industrial  freedom,  but 
a  principle  which  ought  to  be  permanently  adopted.  Pro- 
tection was  affirmed  in  increased  duties  upon  wool,  woollen 
goods,  —  particularly  the  finer  grades,  —  and  dress  goods  ; 
upon  the  finer  cottons,  lawns,  laces,  and  embroideries ;  upon 
linens,  silk  laces,  and  plush  goods ;  upon  cutlery  and  tin- 
plate  ;  and  upon  barley,  hemp,  and  flax.  In  some  cases  the 
duties  were  practically  prohibitory,  and  so  far  forth  the  revenue 
was  certainly  reduced.     The  minimum  principle  was  extended 


§  187]  McKinley  Tariff  of  J890.  439 

beyond  the  experiment  of  1828 ;  for  cotton  stockings,  velvets, 
and  plushes,  boiler  and  plate  iron,  pen-knives,  shotguns,  and 
pistols,  and  table  cutlery,  classes  were  established  based  upon 
values ;  and  on  all  goods  of  the  same  class  the  same  specific 
duty  was  laid.  The  administrative  regulations  for  collecting 
the  customs  were  made  more  stringent  by  another  act  in  the 
same  session. 

Two  new  principles  were  introduced  by  the  McKinley  Act : 
one  was  the  grant  of  a  bounty  of  two  cents  a  pound  for 
fourteen  years  on  the  production  of  sugar  within  the  United 
States ;  and  the  other,  the  recognition  of  commercial  reci- 
procity. The  president  was  empowered  to  levy  duties  by 
proclamation  on  sugar,  molasses,  tea,  coffee,  and  hides,  if  he 
considered  that  any  country,  exporting  these  commodities  to 
the  United  States,  imposed  duties  upon  agricultural  or  other 
produce  of  the  United  States,  which  in  view  of  the  free 
admission  of  sugar,  molasses,  tea,  coffee,  and  hides  into  the 
United  States,  he  might  deem  to  be  reciprocally  unjust  and 
unreasonable.  This  policy  was  especially  designed  to  apply 
to  Central  and  Southern  American  countries,  and  was  adopted 
largely  through  Mr.  Blaine's  influence  as  a  part  of  a  wider 
measure  of  Pan-American  commercial  union.  By  this  method 
the  executive  branch  of  the  government  was  relieved  from 
submitting  to  the  Senate  special  reciprocity  treaties.  Under 
this  act  commercial  agreements  relating  to  reciprocal  trade 
were  made  with  Brazil,  the  Dominican  Republic,  Spain  (for 
Cuba  and  Puerto  Rico),  Guatemala,  Salvador,  the  German 
Empire,  Great  Britain  (for  certain  West  Indian  colonies  and 
British  Guiana),  Nicaragua,  Honduras,  and  Austria-Hungary. 
During  the  debate  the  reciprocity  provision  was  opposed  by 
some  excellent  constitutional  lawyers  within  the  Republican 
party,  on  the  ground  that  Congress  could  not  delegate  its 
taxing  power  to  the  president.  It  is  held,  however,  that  the 
president  did  not  under  this  act  receive  legislative  power,  but 
simply  the  right  to  determine  the  particular  time  when  certain 
legislation  should  go  into  effect. 


44°  Silver  and  the  Tariff.  [§  188 

The  grant  of  a  federal  bounty  also  raised  constitutional 
objections,  more  particularly  after  the  Democrats  came  back 
into  power  in  1893.  In  1895  the  comptroller  of  the  treasury 
refused  to  pay  the  sugar  bounty  levied  while  the  law  was  in 
operation,  on  the  ground  that  such  a  grant  was  unconstitu- 
tional, but  this  contention  was  not  sustained  by  the  Supreme 
Court.  Again,  when  the  bounty  provision  was  dropped  in  the 
Wilson  Tariff  of  1894,  it  was  held  that  under  the  act  of  1890 
a  contract  had  been  made  with  citizens  who  had  invested  their 
capital  in  the  beet-root  industry,  on  the  supposition  that  it 
would  be  protected  for  fourteen  years  ;  this  objection  proved 
of  little  avail,  and  the  sugar-beet  growers  found  themselves  as 
liable  as  other  industries  to  the  uncertainties  of  tariff  legislation. 

188.    The  Gold  Reserve  and  its  Decline. 

The  enactment  of  these  two  important  measures,  the  Sher- 
man Silver-purchasing  Act  and  the  Tariff  Act,  within  a  few 
weeks  of  each  other,  makes  it  hard  to  analyze  the  financial 
situation ;  nor  can  the  effects  of  either  act  be  traced  to  their 
proper  cause.  The  revenues  declined  more  than  was  antic- 
ipated and  commercial  disturbances  caused  an  increased 
exportation  of  gold  which  led  to  the  presentation  of  treasury 
notes  for  redemption  in  gold :  the  net  assets  of  the  govern- 
ment were  reduced ;  and  the  quality  of  the  assets  was  changed. 
Almost  without  warning  the  condition  of  the  treasury  gold 
reserve  assumed  the  highest  importance,  and  its  ups  and 
downs  were  daily  watched  for  and  discussed  with  feverish 
interest  by  bankers  and  moneyed  interests. 

By  the  resumption  act  of  1875  tne  secretary  of  the  treasury 
had  authority  to  accumulate  gold  in  order  to  resume  specie 
payments,  but  no  provision  was  made  by  law  for  a  definite  gold 
reserve  of  a  precise  amount.  No  attention  had  been  paid  to 
the  earlier  recommendations  of  Secretary  Sherman  from  1877 
to  1 88 1  that  the  resumption  fund  be  specifically  defined  and 
set  apart ;  the  so-called  reserve  was  simply  the  balance  of  the 
gold  in  the  treasury,  and  not  a  distinct  account.     It  was  not, 


§  1 88]       Gold  Reserve  and  its  Decline.        441 

as  sometimes  stated,  a  fund  sacredly  pledged  to  redeem  the 
legal  tenders ;  in  reality  if  was  only  a  part  of  the  "  available 
cash."  Consequently  the  proportion  and  character  of  the 
reserve  depended  only  on  the  practice  of  the  treasury  from 
time  to  time.  Two  considerations  finally  determined  in  the 
minds  of  the  public  what  the  size  of  the  redemption  fund 
ought  to  be  :  under  the  resumption  act  no  part  of  the  face 
value  of  the  bonds  sold  for  redemption  purposes  (amounting 
to  $95,500,000)  could  be  applied  to  current  appropriations ; 
and  Secretary  Sherman  in  his  recommendations  preliminary 
to  resumption  suggested  a  minimum  reserve  of  at  least 
$100,000,000.  An  indirect  recognition  of  a  gold  reserve  is 
found  in  an  act  of  1882,  providing  for  an  issue  of  gold  cer- 
tificates, which  declared  that  such  issue  should  be  suspended 
whenever  the  gold  coin  and  bullion  in  the  treasury  reserved 
for  the  redemption  of  the  United  States  notes  fell  below 
$100,000,000.  Some  held  that  a  separation  of  the  treasury 
moneys  into  two  funds,  one  for  redemption  and  another  for 
current  disbursements,  might  be  made  simply  by  administra- 
tive act  without  the  mandate  of  Congress ;  but  when  Secretary 
Manning  in  Cleveland's  administration  tried  to  make  the 
distinction,  he  was  forced  to  abandon  it,  and  the  question 
slipped  along  without  attracting  much  attention ;  nevertheless, 
by  tradition  public  sentiment  adopted  $100,000,000  as  the 
line  of  demarcation  between  safety  and  danger. 

Later,  when  the  silver  question  became  more  pressing,  it 
was  argued  that  there  was  no  authority  for  making  up  this 
fund  out  of  gold  alone ;  that  the  word  coin  in  the  resumption 
act  included  silver.  Another  line  of  argument  was  that  the 
maintenance  of  a  reserve  composed  of  gold  alone  had  cost 
the  government  immense  sums  through  holding  for  years 
$100,000,000  of  "dead"  money;  and  it  was  further  urged 
that  the  law  of  1878  requiring  the  reissue  of  legal-tender 
notes  was  practically  a  suspension  of  the  resumption  act  of 
1875,  as  far  as  tne  redemption  of  the  new  notes  was  con- 
cerned.    The  legal  status  of  the  reserve  was,  however,  of  little 


442  Silver  and  the  Tariff.  [§  188 

concern  as  long  as  the  amount  of  available  gold  in  the  treas- 
ury was  so  large  that  nobody  apprehended  another  suspension 
of  specie  payments. 

For  fourteen  years,  1878-1892,  only  an  insignificant  amount 
of  gold  was  paid  out  by  the  treasury  in  the  redemption  of 
legal-tender  notes ;  the  total  amount  of  gold  in  the  treasury 
increased  almost  steadily  and  continuously  from  $140,000,000 
on  January  1,  1879,  to  $300,000,000  in  1891.  In  1890  the 
new  issue  of  treasury  notes,  together  with  a  change  in  commer- 
cial conditions,  placed  heavy  burdens  upon  the  reserve,  the 
rapid  diminution  of  which  is  shown  in  the  following  figures  :  — 

Date  Net  gold  reserve 

June  30,  1890 $190,232,405 

"     "    1891 117,667,723 

"     "    1892 114,342,367 

"     "    1893 95.485.413 

"      "    1894 64,873,025 

The  reasons  for  the  fall  in  the  gold  reserve  are  too  various 
and  complicated  to  be  treated  here  :  the  failure  of  the  great 
English  banking-house  of  Baring  Brothers  in  1890  brought 
about  a  considerable  withdrawal  of  English  capital  invested 
in  the  United  States ;  and  an  unhealthy  and  inflated  industrial 
development  in  this  country  was  stimulated  by  the  new  tariff. 
To  outward  appearances  the  country  was  very  prosperous ; 
expenditures  were  large,  imports  increased,  and  a  failure  of 
the  crops  in  Europe  in  1891  enlarged  our  grain  exports. 
For  a  brief  season  only,  were  the  natural  effects  of  the  Sher- 
man law  delayed  ;  Europe  soon  recovered,  American  exports 
fell,  and  in  the  six  months  ending  June  30,  1893,  the  balance 
of  trade  against  the  United  States  was  $68,800,000.  The 
tariff  of  1890  was  followed  by  diminished  customs  receipts. 
The  revenue  from  customs  was  as  follows :  — 

1890 $229,668,000 

1891 219,522,000 

1892 177,452,000 

l893 203,355,000 

1894 131,818,000 


8  II 
I 

— 

o" 


2  £ 


§  1 88]      Gold  Reserve  and  its  Decline.         443 

Fortunately  the  internal  revenue  receipts  maintained  their 
customary  level  with  something  to  spare ;  but  increased  ap- 
propriations, due  largely  to  the  passage  of  a  dependent  pen- 
sion bill  in  1890,  cut  deep  into  the  funds  of  the  treasury.     In 

1890  the  surplus  was  $105,344,000;  in  1891,  $37,239,000 ; 
in  1892,  $9,914,000;  in  1893,  $2,341,000;  but  in  1894 
appeared  a  deficit  amounting  to  $69,803,000.  The  treasury 
had  been  weakened  by  the  reluctance  of  Secretary  Windom 
to  deposit  government  funds  in  national  bank  depositories, 
and  by  his  preference  to  rely  entirely  upon  the  purchase  of 
bonds  for  getting  money  back  into  circulation.  In  the  earlier 
years  of  Harrison's  administration,  bonds  were  purchased 
freely,  —  too  generously  in  view  of  the  impending  strain  upon 
the  resources  of  the  treasury. 

Another  element  of  concern  was  due  to  the  change  in  the 
kind  of  money  received  by  the  government  in  the  payment  of 
revenue.  Before  the  passage  of  the  Sherman  Act  nine-tenths 
or  more  of  the  customs  receipts  at  the  New  York  custom- 
house were  paid  in  gold  and  gold  certificates ;  in  the  summer 
of  1 89 1  the  proportion  of  gold  and  gold  certificates  fell  as 
low  as  12  per  cent.,  and  in  September,  1892,  to  less  than  4 
per  cent.  The  use  of  United  States  notes  and  treasury  notes 
of  1890  correspondingly  increased.  The  startling  changes 
which  took  place  in  the  quality  of  the  receipts  from  customs 
at  New  York  are  shown  in  detail  (page  444)  for  the  two  years 

1 89 1  and  1892  by  reducing  the  amounts  to  percentages. 

The  reason  for  this  substitution  of  notes  for  gold  was  partly 
due  to  a  reversal  in  treasury  practice.  For  many  years  it  had 
been  the  custom  of  the  sub-treasury  in  New  York  to  settle  its 
clearing-house  balances  almost  exclusively  in  gold  or  gold 
certificates.  For  example,  in  the  fiscal  year  1 889-1 890  the 
sub- treasury  paid  gold  balances  to  the  banks  of  nearly  $230,- 
000,000,  and  in  the  next  year  $212,000,000.  The  banks  were 
thus  daily  supplied  with  gold  which  they  in  turn  could  furnish 
to  their  customers  either  for  custom  purposes  or  export  deliv- 
eries.    In  August,  1890,  the  treasury  began  the  policy  of  using 


444 


Silver  and  the  Tariff. 


[§  189 


Quality  of  Receipts  from  Customs  at  New  York,  1891- 

1892 

1891 

Gold  coin 

United  States 
notes 

Treasury 
notes 

Gold 
certificates 

Silver 
certificates 

January 

.1 

41 

5-2 

88.  s 

2.1 

February 

1 

5.0 

7-3 

81.0 

6.6 

March 

2 

6.0 

12.4 

64.9 

i6.S 

April 
May 

2 

7-a 

25-6 

47.0 

20.0 

2 

15.0 

30.2 

27.8 

26.8 

June 

2 

44-6 

28.9 

12.3 

14.0 

July 

2 

49.0 

27.4 

14.9 

8-s 

August 

2 

5o-5 

3'5 

12.6 

S-2 

September 

1 

SS-3 

28.4 

11. 7 

4.4 

October 

2 

44° 

3«-6 

19.8 

4-4 

November 

1 

3>-3 

22.3 

43-5 

2.8 

December 

1 

14-8 

16.7 

65-3 

3-' 

1892 

January 

.1 

15.0 

MS 

66.1 

4-3 

February 

1 

36.2 

28.6 

258 

9-3 

March 

1 

42-5 

33-° 

18.7 

5-7 

April 

2 

46.4 

31.6 

14.9 

6.9 

May 

1 

40.6 

36.4 

9.9 

13a 

June 

2 

26.8 

49.1 

8.0 

15.9 

July 

1 

28.4 

42.2 

138 

>5-5 

August 

25.6 

51.9 

12. 1 

10.4 

September 

45.8 

39-7 

3-6 

10.9 

October 

•  1 

51.9 

35-o 

6.6 

6.4 

November 

.1 

52.8 

33 -o 

7.8 

6.3 

December 

46.4 

40.0 

4.4 

9.2 

the  new  treasury  notes  in  the  settlement  of  New  York  balances, 
and  in  the  year  ending  June,  1891,  Secretary  Foster,  appar- 
ently convinced  of  the  need  of  a  larger  gold  reserve  to  sup- 
port the  credit  of  treasury  notes,  increased  the  use  of  the 
older  United  States  notes  and  held  on  to  the  gold  reserve. 
The  unexpected  result  was  that  the  banks,  deprived  of  their 
usual  supply  of  gold  for  trade  purposes,  sought  for  it  at  the 
treasury  by  the  presentation  of  government  notes. 


189.    Panic  of  1893;  Repeal  of  Silver  Purchases. 

In  March,  1893,  Cleveland  for  a  second  time  entered  upon 
the  presidency.  He  demanded  as  the  first  condition  of  relief 
the  suspension  of  silver  purchases.  The  silver  advocates,  how- 
ever, were  still  powerful  in  both  parties,  and  President  Cleve- 
land was  at  a  disadvantage  in  not  having  the  undivided  support 
of  his  own  party.     Even  the  position  of  Secretary  Carlisle  was 


§  189]         Repeal  of  Silver  Purchases.  445 

doubted  :  it  was  publicly  declared  that  he  stood  ready,  if  ex- 
pediency demanded  it,  to  redeem  the  treasury  notes  of  1890 
in  silver  instead  of  gold,  and,  while  standing  upon  the  letter 
of  the  law  which  demanded  their  redemption  in  coin,  practi- 
cally to  cut  asunder  the  parity  of  gold  and  silver  which  had 
thus  far  been  maintained.  Although  the  president  attempted 
by  a  specific  declaration  to  make  clear  the  harmonious  pur- 
pose of  the  administration  that  redemption  would  continue 
in  gold,  public  apprehension  would  not  be  allayed.  Whatever 
might  be  the  wishes  of  the  administration,  it  was  feared  that 
it  would  not  have  power  to  carry  them  out ;  particularly  when 
it  was  announced  in  April,  1893,  that  the  gold  reserve  had 
been  drawn  down  to  $96,000,000  by  redeeming  the  treasury 
notes  of  1890. 

At  this  juncture  of  financial  and  commercial  difficulties,  in 
June,  1893,  tne  British  government  closed  the  mints  in  India 
to  the  free  coinage  of  silver.  The  price  of  silver  bullion  fell 
promptly  and  rapidly,  and,  while  such  a  decline  might  on  another 
occasion  have  produced  no  immediately  serious  consequences 
to  the  treasury,  it  came  at  a  moment  when  public  opinion,  at 
least  in  the  Eastern  States,  was  aroused  to  a  belief  that  the 
entire  financial  problem  was  associated  with  the  coinage  of 
silver ;  and  it  thus  furnished  one  of  the  contributory  forces 
which  drove  the  commercial  community  into  a  state  of  panic. 

It  was  not  until  June  30,  1893,  when  the  panic  was  well 
under  way,  that  a  special  session  of  Congress  was  called  for 
August  7  ;  only  by  the  most  strenuous  efforts  could  an  ade- 
quate support,  composed  of  elements  in  both  political  parties, 
be  rallied  to  uphold  the  president's  insistence  that  purchases 
of  silver  by  the  government  should  cease.  The  House  quickly 
acquiesced,  and  on  August  21,  by  a  vote  of  239  to  108,  passed 
a  bill  for  the  repeal  of  the  purchasing  clause  ;  but  the  Senate 
was  stubborn,  and  not  until  October  30  could  a  favorable  vote, 
43  to  32,  be  secured.  So  far  as  the  treasury  was  concerned, 
the  mischief  had  been  done ;  although  the  government  was 
relieved  from  further  purchase  of  silver  which  increased  the 


446  Silver  and  the  Tariff.  [§  189 

volume  of  obligations  to  be  supported  by  gold,  the  old  burdens 
still  were  sufficiently  heavy,  in  connection  with  the  low  state 
of  commerce  and  industry,  to  exhaust  its  immediate  revenues. 
Thus  on  December  1,  1893,  trie  actual  net  balance  in  the 
treasury  above  the  gold  reserve,  pledged  funds  and  agency 
accounts  was  only  $11,038,448.  Trade  and  industry  had 
been  disorganized;  the  panic  of  1893  extended  into  every 
department  of  industrial  life.  In  December,  1893,  the  comp- 
troller of  the  currency  announced  the  failure  during  the  year 
of  158  national  banks,  172  State  banks,  177  private  banks, 
47  savings  banks,  13  loan  and  trust  companies,  and  6  mortgage 
companies.  Some  of  these  institutions  afterwards  resumed 
business,  but  the  permanent  damage  was  great.  The  fright  of 
depositors  was  general  and  the  shrinkage  in  deposits  enor- 
mous; bank  clearings  were  the  lowest  since  1885;  clearing- 
house loan  certificates  were  once  more  resorted  to,  this  time 
on  a  much  larger  scale  than  ever  before,  and  extended  to 
cities  throughout  the  country. 

The  production  of  coal,  both  anthracite  and  bituminous, 
fell  off;  the  output  of  pig-iron,  which  had  been  about  9,157,- 
000  tons  in  1892,  fell  to  6,657,000  tons  in  1894  ;  new  railway 
construction  almost  ceased;  in  1894  there  were  156  railways, 
operating  a  mileage  of  nearly  39,000  miles,  in  the  hands  of 
receivers ;  among  these  were  three  great  railway  systems,  — 
the  Erie,  Northern  Pacific,  and  Union  Pacific.  The  total 
capitalization  in  the  hands  of  receivers  was  about  $2,500,000,- 
000,  or  one-fourth  of  the  railway  capital  of  the  country.  The 
earnings  of  railroads  and  the  dividends  paid  to  stockholders 
were  seriously  affected ;  securities  fell  to  one-half  and  even 
one-quarter  their  former  value  ;  commercial  failures  increased 
from  10,344  in  1892,  with  liabilities  of  $114,000,000,  to 
15,242  in  1893,  with  liabilities  of  $346,000,000.  The  prob- 
lem of  the  unemployed  became  general ;  special  committees 
were  organized  in  nearly  all  of  the  large  cities  to  provide 
food,  and  in  many  places  relief  work  by  public  bodies  was 
instituted.     In  the  spring  of  1894  general  want  and  distress 


§  190]  Sale  of  Bonds  for  Gold.  447 

led  to  labor  strikes  and  riots,  as  in  Chicago,  and  even  to 
more  abnormal  outbreaks,  as  seen  by  the  march  of  Coxey's 
army  of  unemployed  from  Ohio  to  Washington.  The  distress 
was  increased  by  the  failure  of  the  corn  crop  in  1894;  the 
demand  for  wheat  in  Europe  fell  off  and  wheat  was  sold  on 
the  Western  farm  for  less  than  fifty  cents  a  bushel. 


190.     Sale  of  Bonds  for  Gold. 

Under  these  adverse  conditions  it  was  inevitable  that  the 
revenues  of  the  government  should  continue  to  decline.  In 
the  six  months,  January  to  June,  1893,  the  excess  of  expendi- 
tures over  receipts  was  $4,198,000,  and  during  the  fiscal  year 
ending  June  30,  1894,  this  excess  increased  to  $69,803,000. 
It  was  even  necessary  to  encroach  upon  the  gold  reserve  for 
current  expenses,  and  for  months  this  fund  was  far  less  than 
caution  and  prudence  demanded.  When  the  integrity  of  the 
gold  reserve  was  first  assailed,  both  Secretary  Foster,  in  the 
closing  months  of  Harrison's  administration,  and  Secretary 
Carlisle,  at  the  beginning  of  Cleveland's  term,  endeavored, 
with  some  success,  to  tide  over  emergencies  by  appealing  to 
the  banks  to  exchange  gold  for  legal  tenders.  The  banks 
recognized  that  the  instability  of  government  credit  seriously 
affected  the  value  of  all  securities  in  which  they  were  inter- 
ested ;  and  in  February,  1893,  they  handed  over  to  the 
treasury  about  $6,000,000  in  gold,  and  in  March  and  April 
about  $25,000,000  more.  The  expedient  was  not  enough  to 
stop  the  continued  drain  upon  the  treasury.  At  the  very 
moment  that  the  government  was  relieved  of  notes  through 
the  exchange  of  gold  by  the  banks,  other  notes  were  presented 
to  the  treasury  for  redemption,  largely  to  draw  gold  for  expor- 
tation in  the  settlement  of  trade  balances.  The  decline  of 
revenue,  the  presentation  of  notes  for  redemption  in  gold,  and 
the  proportion  of  the  flow  of  gold  to  foreign  countries  as 
compared  with  the  domestic  supply  through  mining,  is  shown 
by  years  in  the  following  table  :  — 


44« 


Silver  and  the  Tariff. 


[§  l9° 


Fiscal 

year 

ending 

June  30 

Excess  of 
revenue  over 
expenditures 

Excess  of 
expenditures 
over  revenue 

Legal-tender 
notes  pre- 
sented for 
redemption 

Excess  of 
exports  of  gold 
over  imports 

Gold  product 

of 
United  States 

1889 
1890 
1891 
1892 
1893 
1894 

$105,053, 000 

"05,344.000 

37,240,000 

9,914,000 

2,342,000 

$69,803,000 

#730,000 

732,000 

5,986,000 

9,126,000 

102,100,000 

84,842,000 

$49,667,000 

4,331,000 

68,130,000 

496,000 

87,506,000 

4,528,000 

$32,800,000 
32,845,000 
33,175,000 
33,000,000 
36,000,000 
39,500,000 

$214,660,000 

$207,320,00) 

The  only  way  to  protect  the  fund  of  gold  reserve  under  the 
circumstances  was  borrowing, —  that  is,  the  sale  of  bonds  for 
gold, —  yet  some  people  who  were  opposed  to  the  overthrow  of 
the  gold  standard  consistently  urged  that  borrowing  be  post- 
poned until  the  last  moment,  so  as  to  add  as  little  as  possible 
to  the  resources  available  for  purchases  of  silver.  Some  of  the 
gold  party  would  even  have  permitted  the  drain  to  go  on  to 
the  end,  notwithstanding  the  inevitable  evils,  in  the  belief  that 
the  country  could  be  convinced  of  its  errors  in  no  other  way. 

Eventually,  to  prevent  a  suspension  of  specie  payments  in 
gold,  the  treasury  department  made  successive  issues  of  bonds 
for  the  purchase  of  gold.  These  issues  are  very  interesting  to 
the  student  of  finance.  No  administration  wishes  to  add  to 
public  indebtedness  in  times  of  peace  ;  and  Secretary  Carlisle 
had  scruples  against  selling  bonds,  except  with  the  authority 
of  the  Congress  then  sitting ;  hence  the  issue  of  bonds  was  put 
off  to  the  last  possible  moment.  The  only  existing  authority 
for  selling  bonds  was  the  resumption  act  of  1875  ;  this  pro- 
vided only  for  ten-year  5  per  cent.,  fifteen-year  4%,  and  thirty- 
year  4  per  cent,  bonds,  all  of  which  would  command  a  premium 
so  high  as  to  diminish  their  attractiveness  as  an  investment, 
and,  taken  in  connection  with  the  length  of  time  which  they 
ran,  to  hamper  the  treasury  in  purchasing  or  refunding  the  debt 
when  the  crisis  was  over.  The  administration  asked  for  the 
issue  of  low-rate  bonds,  but  Congress,  inspired  in  part  by  free 
silver  arguments,  and  in  part  by  political  intrigues  to  discredit 


§  190]  Sale  of  Bonds  for  Gold.  449 

the  administration,  paid  no  attention  to  the  recommendation 
of  the  secretary.  Finally,  in  January,  1894,  without  special 
legislation,  but  under  the  ancient  authority  of  the  resump- 
tion act,  $50,000,000  of  5  per  cent,  ten-year  bonds  were 
sold,  yielding  $58,660,917  ;  and  again  in  November  an  equal 
amount  of  bonds  with  like  conditions  were  marketed,  yielding 
$58,538,500.  The  sale  of  the  first  issue  was  on  the  whole 
creditable,  considering  that  at  about  the  same  time  the  presi- 
dent was  obliged  to  veto  a  bill  providing  for  coining  the  silver 
seigniorage,  and  that  an  effort  had  been  made  in  the  courts  to 
enjoin  the  secretary  of  the  treasury  from  selling  bonds  under 
the  law  of  1875. 

In  each  case  the  sale  of  bonds  called  for  subscriptions  in 
gold,  but  the  new  supplies  were  quickly  exhausted  by  fresh 
redemption  of  notes.  The  fluctuations  in  the  volume  of  gold  in 
the  treasury  as  a  consequence  of  the  bond  sales  is  seen  in  the 
following  figures  : 

Date  Gold  in  treasury 

January       31,  1894 $65,650,000 

February     10,     "  104,119,000  Bond  issue 

November  20,     "  59,054,000 

"           30,     "  105,424,000  BonAissue 

February      9,  1895 41,393,000 

The  endless  chain  appeared  to  be  in  full  and  unceasing 
operation  ;  not  only  was  gold  being  withdrawn  for  export  but 
also  for  individual  hoarding,  in  fear  of  an  impending  suspension 
of  gold  payments.  The  treasury  finally  recognized  the  futility 
of  selling  bonds  for  gold,  most  of  which  was  drawn  out  of  the 
treasury  itself,  by  the  presentation  of  legal-tender  notes  for 
redemption.  A  new  device  was  tried  :  in  February,  1895,  the 
secretary  of  the  treasury  entered  into  a  contract  with  certain 
bankers,  for  the  purchase  of  3,500,000  ounces  of  standard 
gold  at  the  price  of  $17.80441  per  ounce,  to  be  paid  for  by 
the  delivery  of  United  States  bonds  having  thirty  years  to  run 
and  bearing  4  per  cent,  interest ;  not  less  than  one-half  of 
this  gold  was  to   be   procured  abroad,  and   the  parties  with 

29 


45°  Silver  and  the  Tariff.  [§  191 

whom  the  contract  was  made  stipulated  that  they  would  "as 
far  as  lies  in  their  power  exert  all  financial  influence  and  make 
all  legitimate  efforts  to  protect  the  treasury  of  the  United 
States  against  the  withdrawals  of  gold,  pending  the  complete 
performance  of  this  contract."  An  ounce  of  standard  gold 
was  worth  $18.60465,  and  the  difference  between  that  sum 
and  the  contract  price  represented  the  premium  received  by 
the  government  on  the  bonds,  making  the  price  at  which  the 
bonds  were  accepted  $104.4946.  A  condition  was  affixed  to 
the  contract,  by  which,  in  case  congressional  authority  could 
be  secured,  a  3  per  cent,  gold  bond  might  be  substituted,  and 
for  this  the  syndicate  agreed  to  pay  a  higher  price. 

In  view  of  the  unfavorable  terms  of  the  bargain  imposed  by 
this  contract,  the  administration  hoped  that  Congress  would 
promptly  act  and  authorize  the  issue  of  the  lower  and  more 
remunerative  bond.  Faithful  in  its  adherence  to  silver,  Con- 
gress could  not  be  swerved  •  it  defeated  the  bill  authorizing 
the  sale  of  a  low- rate  gold  bond,  and  then  engaged  in  an  angry 
debate  denouncing  the  executive  for  his  subserviency  to  the 
gold  standard  banking  interests  in  entering  into  a  contract  not 
only  disgraceful  but  illegal.  In  reply  it  could  be  shown  that 
the  New  York  sub-treasury  was  within  forty-eight  hours  of 
gold  exhaustion. 

191.    Legality  of  the  Bond  Issues. 

A  prolonged  debate  followed  over  the  powers  of  the  execu- 
tive, involving  a  discussion  of  section  3700  of  the  Revised 
Statutes,  originally  passed  in  1862,  which  authorized  the  sec- 
retary of  the  treasury  "  to  purchase  coin  with  any  of  the  bonds 
or  notes  of  the  United  States  authorized  by  law,  at  such  rates 
and  upon  such  terms  as  he  may  deem  most  advantageous  to 
the  public  interest;"  of  the  funding  act  of  1870,  which  de- 
tailed the  kinds  of  bonds  that  could  be  issued  in  funding, 
and  which  forbade  any  increase  of  indebtedness  through  the 
issue  of  bonds  for  funding  purposes ;  and  in  particular  of  the 
resumption  act  of  1875. 


§  191]        Legality  of  the  Bond  Issues.  451 

The  opposition  laid  great  stress  upon  the  wording  of  this 
last  measure  which  gave  to  the  secretary  of  the  treasury  power 
"to  prepare  and  provide  for  the  redemption"  of  the  legal- 
tender  notes  through  the  use  of  surplus  reserves  and  the  sale 
of  bonds.  No  authority,  it  was  declared,  was  given  to  main- 
tain redemption  ;  no  permanent  powers  were  thus  bestowed 
upon  the  executive.  Cannot  the  people  through  their  Con- 
gress be  trusted  to  meet  their  obligations,  whether  current  or 
plighted,  for  the  redemption  of  paper  money?  It  was  held 
contrary  to  the  spirit  of  the  Constitution  that  the  executive 
department  should  be  able  of  its  own  discretion  to  create 
debt,  burden  the  people  with  interest  charges,  and  thus  neces- 
sitate taxation  without  legislative  sanction.  Such  a  practice 
was  entirely  inconsistent  with  the  fundamental  principles  of 
popular  government,  for  by  it  the  executive  could  set  aside  the 
wish  of  the  legislature  and  dispense  altogether  with  the  aid  of 
Congress  in  raising  money. 

Again  it  was  urged  that  the  issue  of  bonds  for  redemption 
purposes  was  limited  by  the  amount  of  legal  tender  in  circu- 
lation in  1875.  At  that  time  no  provision  was  made  for  the 
reissue  of  the  notes ;  the  possibility  of  an  endless  chain  was 
not  suggested.  Authority  for  a  fixed  volume  of  circulation 
($346,000,000)  and  for  the  reissue  of  notes  was  not  granted 
until  1878;  was  it  probable,  therefore,  that  the  act  of  1875 
in  its  provision  for  sale  of  bonds  could  have  contemplated  the 
use  made  during  the  years  1894-1896?  In  that  case  could 
not  the  secretary  of  the  treasury  issue  bonds  as  many  times 
as  the  legal-tender  notes  were  passed  over  the  counters  of 
the  treasury?  Under  no  circumstances,  it  was  reasoned,  was 
there  authority  to  sell  bonds  to  redeem  the  treasury  notes  of 
1890,  for  at  best  the  power  under  the  act  of  1875  was  limited 
to  the  earlier  greenbacks. 

All  this  discussion,  however,  was  really  off  the  main  con- 
tention which  was  that  there  was  a  surplus  on  hand  for 
redemption  if  the  secretary  would  only  use  silver ;  not  only 
was  there  the  free  silver  in  the  treasury,  there  were  also  poten- 


452  Silver  and  the  Tariff.  [§  191 

tial  funds  in  the  "coinage  of  the  seigniorage,"  and  in  the 
coinage  of  the  silver  purchased  and  stored  under  the  act  of 
1890.  Here  was  a  reserve,  a  locked-up  surplus  of  nearly  three 
hundred  million  dollars ;  how  absurd,  said  the  silverite,  to 
declare  that  the  treasury  needed  replenishing  by  borrowing  ! 
Why  should  silver  be  dishonored  by  not  issuing  it  for  redemp- 
tion purposes?  Moreover,  this  dishonor  was  wholly  without 
warrant,  for  the  act  of  1890  expressly  stated  that  it  was  "  the 
established  policy  of  the  United  States  to  maintain  the  two 
metals  on  a  parity,"  and  the  act  of  1893  repealing  coinage 
further  "  declared  that  the  efforts  of  the  government  should 
be  steadily  directed  to  the  establishment  of  such  a  safe  system 
of  bimetallism  as  will  maintain  at  all  times  the  equal  power 
of  every  dollar  coined  or  issued  by  the  United  States  in  the 
markets  in  the  payment  of  debts."  By  parity,  it  was  urged, 
was  meant  something  more  than  redeemability ;  equality  was 
its  true  significance  ;  "  parity  "  is  when  "  one  is  as  strong  and 
as  tall  as  the  other,  and  is  able  to  bear  as  much  burden  as 
the  other."  There  could  be  no  parity  as  long  as  the  govern- 
ment's creditor  was  given  an  option  in  the  selection  of  the 
metal  in  which  payment  could  be  made. 

Extremists  went  so  far  as  to  declare  that  the  panic  of  1893 
was  brought  about  by  a  well-defined  conspiracy  of  bankers 
"to  bring  the  government  to  its  knees  and  bully  the  people 
into  submission  to  their  terms."  It  was  stated  and  apparently 
believed  that  capitalists,  not  finding  profitable  investment  in 
railroads,  mines,  and  manufactures,  desired  further  issue  of 
bonds  in  order  that  they  might  "  invest  their  surplus  in  the 
muscle,  blood,  and  sweat  of  the  American  people,  and  fix  that 
investment  far  beyond  the  power  of  emancipation." 

The  reply  to  these  arguments  was  the  swift  and  positive 
assertion  that  by  existing  law  the  secretary  was  under  obliga- 
tion to  borrow  money  to  protect  the  credit  of  the  nation,  and 
that  the  powers  granted  under  the  act  of  1875  were  con- 
tinuous until  repealed.  There  was  a  contract  morally  binding 
upon  the  government  and  possibly  legally  binding,  to  pay  gold 


§  191]        Legality  of  the  Bond  Issues.  453 

to  the  holder  of  every  legal-tender  note,  and  for  this  purpose 
the  government  should  if  necessary  sell  bonds.  A  refusal  to 
pay  gold  on  demand  would  send  it  to  a  premium  and  thus 
destroy  the  parity  which  had  been  stipulated  in  the  act  of 
1890.  As  for  using  silver  for  redemption,  that  practically 
involved  the  whole  question  of  the  free  coinage  of  silver,  —  a 
question  which  should  be  settled  on  its  own  merits,  and  not 
forced  upon  the  country  indirectly  by  depriving  the  executive 
of  borrowing  powers  previously  granted. 

In  addition  to  the  criticism  upon  the  general  question 
of  the  issue  of  bonds,  the  contract  with  the  syndicate  is  of 
special  interest  for  two  reasons  :  first,  because  it  was  a  nota- 
ble example  of  the  assumption  of  administrative  obligations 
by  private  bankers,  in  promising  to  protect  for  a  definite 
period  the  gold  fund  of  the  government ;  in  the  second  place, 
it  was  an  attempt  on  a  large  scale  to  import  gold  and  pre- 
vent its  exportation  through  the  manipulation  of  the  for- 
eign exchange  market.  The  government  on  its  side  was 
forced  to  onerous  conditions,  yet  thought  it  wise  to  make 
the  arrangements  secretly,  or  at  least  through  agents  selected 
without  competition. 

The  history  of  this  negotiation  and  the  difficulties  attending 
the  control  of  the  international  movement  of  gold  in  the  face 
of  adverse  commercial  conditions  lie  outside  of  this  narrative ; 
here  it  is  only  necessary  to  state  that  at  first  the  syndicate  was 
successful,  because  of  some  slight  improvement  in  trade,  but 
later  it  practically  failed  to  control  the  price  of  exchange.  It 
once  more  became  cheaper  for  merchants  to  ship  gold  than 
to  purchase  bills,  and  gold  continued  to  be  withdrawn  from 
the  treasury.  On  December  3,  1895,  the  gold  reserve  stood 
at  $79,333,000,  and  after  the  commercial  apprehension  caused 
by  President  Cleveland's  Venezuelan  message  a  fortnight  later, 
the  reserve  was  still  further  reduced.  Once  more  the  admin- 
istration resorted  to  a  bond  sale,  and  again  the  action  was  pre- 
ceded by  a  special  message  from  the  president  to  Congress 
asking  for  a  grant  of  authority  to  issue  gold  bonds  instead  of 


454  Silver  and  the  Tariff.  [§191 

coin  bonds,  and  also  for  the  retirement  of  the  legal-tender 
notes  which  continued  in  an  endless  chain  their  journey  to  the 
treasury,  and  drove  off  gold  to  the  commercial  market.  As 
Congress  still  refused  to  act,  the  treasury  resorted  to  a  fourth 
issue  of  $100,000,000  4  per  cent,  bonds.  The  treasury  now 
carefully  avoided  any  appearance  of  dealing  through  a  syndi- 
cate and  publicly  advertised  for  offers,  with  the  encouraging 
result  of  4640  bids,  amounting  to  $684,262,850.  781  dif- 
ferent bids  were  accepted  and  the  premium  yielded  about 
$11,000,000.  The  relief  obtained  by  the  treasury,  however, 
was  meagre,  for  it  is  estimated  that  $40,000,000  of  the  bonds 
were  purchased  with  gold  withdrawn  from  the  treasury  by  the 
redemption  of  notes.  This  was  the  government's  penalty  for 
its  endeavor  to  separate  itself  from  all  dealings  with  a  banking 
syndicate. 

In  spite  of  this  sale  of  bonds  the  reserve  remained  near 
the  traditional  danger  line.  In  July,  1896,  it  fell  to 
$90,000,000  because  of  hoarding  due  to  popular  apprehension 
as  to  the  success  of  the  silver  movement  in  the  November 
presidential  election.  Fearful  that  a  new  bond  issue  might 
strengthen  the  claims  of  the  silver  advocates,  bankers  and 
dealers  in  foreign  exchange  voluntarily  combined  to  support 
the  treasury  by  exchanging  gold  for  notes.  The  effort  suc- 
ceeded, and  the  reserve  was  placed  in  safety.  After  the 
elections  in  November  gold  came  out  from  its  hiding- 
places,  and  was  turned  into  the  treasury  in  large  amounts. 
Business  and  revenue  improved  and  the  difficulties  of  the 
treasury  department  were  tided  over. 

Many  Republicans  held  the  earnest  conviction  that  the 
issue  of  bonds  would  not  have  been  necessary  if  the  revenue 
had  been  sufficient.  Not  only  had  industry  and  commerce 
been  unsettled  by  the  tariff  act  of  1894,  but  the  operations 
of  the  endless  chain  must  certainly  continue,  it  was  held, 
until  there  was  a  generous  income  in  excess  of  expenditures, 
whereby  a  considerable  part  of  the  credit  currency  might  be 
covered  into  the  treasury  and  thus  lessen  the  possible  claims 


§  192]        The  Gorman-Wilson  Tariff.  455 

for  redemption.  The  administration  emphatically  replied  that 
at  no  time  when  bonds  were  issued  was  there  intention  of 
paying  the  expenses  of  the  government  with  their  proceeds, 
and  that  the  treasury  department  had  no  authority  whatever 
to  issue  bonds  for  such  purposes.  President  Cleveland  was 
insistent  that  on  each  occasion  of  a  bond  issue  there  were 
sufficient  funds  in  the  treasury  to  meet  the  ordinary  expen- 
ditures of  the  government.  The  proceeds  of  the  bonds  sold 
for  the  maintenance  of  the  national  credit  were,  however, 
turned  into  the  general  fund  of  the  treasury,  and  consequently, 
though  not  originally  designed  for  that  purpose,  employed  to 
meet  indiscriminately  all  demands  made  upon  the  government, 
whether  for  redemption  of  notes  or  the  payment  of  debts. 
The  tables  in  the  next  chapter  show  that  there  was  a  series  of 
deficits  beginning  with  1894,  but  the  deficit  by  no  means 
equalled  the  amounts  of  bonds  sold. 

192.    The  Gorman-Wilson  Tariff. 

When  the  Democrats  returned  to  power  in  March,  1893,  it 
was  with  the  distinct  understanding  that  the  tariff  should  be 
revised.  Between  1890  and  the  election  of  1892  the  McKin- 
ley  tariff  was  held  responsible  for  the  general  increase  of  prices 
and  aroused  a  strong  and  immediate  revulsion  of  popular 
feeling.  Within  a  month  after  the  passage  of  the  McKinley 
tariff  act  the  Democrats  swept  the  country  in  the  congres- 
sional elections  of  November,  1890.  As  the  Republicans  re- 
tained the  Senate,  no  revenue  legislation  got  even  as  far  as 
the  president.  The  tariff  issue  was  again  uppermost  in  1892, 
for  the  financial  difficulties  of  the  treasury  had  not  yet  been 
clearly  revealed  to  the  public.  Relying  upon  the  arguments 
of  increased  prices  and  the  dangerous  power  of  trusts,  which 
were  denounced  as  creatures  of  the  tariff,  the  Democrats 
gained  complete  victory.  Although  conditions  greatly  changed 
in  the  year  between  the  election  and  the  assembling  of  the 
new  Congress  in  December,  1893,  the  Democratic  party 
leaders  determined   to   carry  out   their  pre-election  pledges. 


45 6  Silver  and  the  Tariff.  [§  192 

Discipline  within  the  party,  however,  had  been  weakened  by 
dissensions  created  by  the  continued  struggle  over  the  repeal 
of  the  silver-purchase  act,  and  the  Democratic  majority  in  the 
Senate  was  small,  so  that  the  proposed  legislation  required  not 
only  determination,  but  also  very  considerable  compromise. 

The  House  measure  as  it  first  appeared  under  the  leader- 
ship of  Mr.  William  L.  Wilson,  while  of  necessity  a  concession 
to  the  adjustment  of  business  under  the  protection  policy, 
was  a  step  in  the  direction  of  freer  trade.  In  the  Senate  the 
bill  was  changed,  under  the  guidance  of  Senator  Gorman,  until 
the  protective  elements  fairly  outweighed  any  principle  of 
reform.  The  so-called  Wilson  Tariff  Bill,  passed  August  27, 
1894,  was  therefore  by  no  means  satisfactory  to  those  who 
sincerely  believed  in  tariff  reform  ;  the  dissatisfaction  of  Presi- 
dent Cleveland  was  such  that  he  refused  to  sign  the  bill  and 
allowed  it  to  become  a  law  by  passive  neglect.  In  a  letter  to 
Representative  Catchings  he  complained  that  "  Senators  have 
stolen  and  worn  the  livery  of  Democratic  tariff  reform  in  the 
service  of  Republican  protection."  The  details  of  this  tariff, 
which  continued  in  force  less  than  three  years,  are  for  the 
most  part  of  little  present  interest ;  rates  were  modified  here 
and  there,  and  the  free  list  was  extended  so  as  to  include  wool, 
and  duties  were  reimposed  on  sugar.  But  these  revisions  of 
schedules  do  not  disclose  the  application  of  any  uniform  or 
consistent  principle.     Reciprocity  was  practically  abandoned. 

The  tariff  act  of  1894  reintroduced  an  income  tax,  providing 
that  a  tax  of  2  per  cent,  be  levied  on  all  incomes  above  $4000. 
Besides  the  usual  arguments  that  such  a  tax  was  inquisitorial, 
created  perjury,  was  undemocratic  and  unconstitutional,  a 
more  serious  objection  was  brought,  that  it  made  a  discrimina- 
tion against  the  well-to-do  and  was  a  demagogic  bid  for  the 
support  of  the  poorer  classes.  Obviously  with  such  a  high 
limit  of  exemption  and  low  rate  of  taxation  the  total  proceeds 
from  a  revenue  point  of  view  could  not  be  great.  The  adop- 
tion of  a  limit  of  exemption  at  $4000  was  largely  due  to  the 
strenuous  efforts  of  the    Populist   party.     Almost  the   entire 


§  192]        The  Gorman-Wilson  Tariff.  457 

support  of  the  measure  came  from  the  South  and  West ;  from 
New  England,  Pennsylvania,  and  New  York  there  were  but 
five  votes  in  the  House  of  Representatives  in  its  favor. 

The  income  tax  provision  was  brought  before  the  Supreme 
Court  in  its  October  term,  1894,  on  the  ground  of  unconstitu- 
tionality, in  the  case  Pollock  v.  Farmers'  Loan  and  Trust  Co. 
(157  U.  S.  429).  Four  questions  were  involved  :  first,  whether 
a  tax  on  the  income  of  real  estate  is  a  direct  tax  within  the 
meaning  of  the  Constitution,  and  therefore  unconstitutional 
unless  imposed  by  the  rule  of  apportionment ;  second,  whether 
a  tax  on  income  of  personal  estate  is  a  direct  tax ;  third, 
whether  the  act  infringed  the  rule  of  uniformity ;  fourth, 
whether  the  tax  imposed  upon  income  from  State  and  muni- 
cipal bonds  is  constitutional.  The  court  unfortunately  showed 
uncertainty  as  to  its  conviction.  In  an  opinion  rendered 
April  8,  1895,  the  court  held  that  the  tax  on  rent  or  income 
from  land  was  a  direct  tax,  and  therefore  unconstitutional 
unless  apportioned  ;  it  was  evenly  divided  as  to  whether  a 
tax  on  income  derived  from  other  sources,  as  trade  or  money 
at  interest,  was  direct,  and  consequently  declined  to  declare 
that  part  of  the  law  unconstitutional.  This  left  the  issue  in 
a  most  unsatisfactory  form,  and  a  re-hearing  was  arranged 
for  May  6.  As  a  result  of  re-argument  one  of  the  justices 
changed  his  opinion,  and  in  the  second  decision,  delivered 
May  20  (158  U.  S.  601),  the  court  decided  against  the  con- 
stitutionality of  the  measure  on  all  four  points. 

This  practically  reverses  the  decision  of  the  Supreme  Court 
in  1880,  in  the  case  of  Springer  v.  United  States  (102  U.  S. 
586),  involving  the  question  of  the  constitutionality  of  the 
income  tax  of  the  Civil  War.  The  court  at  that  time  closely 
followed  precedent  and,  adopting  the  definitions  accepted  in 
Hylton  v.  United  States,  according  to  which  the  only  direct 
taxes  within  the  meaning  of  the  Constitution  are  capitation 
taxes  and  taxes  on  real  estate,  declared  that  the  income  tax 
complained  of  was  within  the  category  of  an  excise  or  duty. 
In  1895  there  was  a  much  more  elaborate  if  not  ingenious  dis- 


458  Silver  and  the  Tariff.  [§  193 

cussion,  both  by  the  counsel  and  the  court,  not  only  of  the 
legal  and  historical  precedents,  but  also  of  the  definitions  cur- 
rent in  economic  literature.  In  the  public  discussion  and  in 
some  of  the  court  opinions  the  question  was  treated  not  so 
much  from  fiscal  expediency  as  from  the  standpoint  of  funda- 
mental principles  of  liberty  and  right  government.  On  the 
one  side  were  those  who  were  convinced  that  wealth  should 
be  taxed  as  such ;  on  the  other,  those  who  saw  the  beginning 
of  a  class  oppression  of  property  interests.  It  was  also  charged 
that  the  measure  was  sectional  in  its  aim ;  by  putting  the  limit 
of  exemption  as  high  as  $4000,  the  South  and  West  would 
largely  escape  the  burdens  of  the  tax.  Since  the  decision  of 
the  court  was  adverse,  further  discussion  of  a  federal  income 
tax  becomes  largely  academic  :  possibly  an  income  tax  can  be 
framed  which  would  avoid  the  constitutional  objections ;  if  so, 
a  revival  of  the  tax  is  likely. 

The  inconsistencies  of  the  tariff  of  1894  were  recognized  by 
many  Democrats.  Defeated  in  the  effort  to  make  a  consistent 
general  revision,  several  so-called  "  pop-gun  "  bills  passed  the 
House  :  bills  to  place  raw  materials,  as  coal,  iron,  and  sugar, 
on  the  free  list.  They  all  failed  in  the  Senate.  Such  a  policy 
was  harassing  to  commercial  interests  and  tended  to  the  un- 
settlement  of  business  affairs.  The  result  was  a  lack  of  con- 
fidence in  the  financial  ability  of  the  Democratic  party ;  a 
popular  feeling  sprang  up  that  even  the  tariff  of  1894  favored 
the  trusts,  now  looming  into  power ;  and  the  failure  of  the 
income  tax  provisions  to  stand  judicial  review  led  to  charges 
that  some  of  the  Democratic  leaders  were  insincere. 

193.    Currency  Measures. 

When  the  tariff  bill  of  1894  was  disposed  of,  the  attention 
of  Congress  was  once  more  concentrated  upon  the  credit  cur- 
rency, and  again  the  greatest  variety  of  views  found  expression. 
At  one  extreme  were  those  who  attributed  the  financial  ills  to 
the  over-issue  of  government  notes,  and  who  insisted  that  the 
remedy  lay,  if  not  in  the  absolute  destruction  of  such  issues,  at 


§  193]  Currency  Measures.  459 

least  in  their  temporary  withdrawal  or  suppression  by  some 
indirect  process,  so  that  the  treasury  might  not  be  plagued  by 
the  demand  for  redemption.  President  Cleveland  was  of  this 
class;  and  his  secretary  of  the  treasury,  Mr.  Carlisle,  was 
finally  converted  to  the  same  view.  In  harmony  with  the  idea 
was  the  proposition  of  Mr.  Gage,  then  a  banker  in  Chicago, 
that  $200,000,000  in  bonds  should  be  issued  for  subscription  in 
treasury  notes,  which  were  then  to  be  cancelled,  on  the  ground 
that  "  the  government  must  be  taken  out  of  the  note-issuing 
business."  It  was  maintained  that  the  desperate  endeavor  to 
uphold  the  redeemability  of  treasury  notes  resulted  in  a  large 
increase  of  federal  indebtedness,  and  that  it  would  be  far 
better  to  purchase  and  cancel  notes  outright  with  that  outlay ; 
all  the  notes  of  1890  and  a  portion  of  the  greenbacks  might 
then  be  destroyed. 

Absolute  cancellation  was  in  general  regarded  as  too  radi- 
cal, and  Secretary  Carlisle  voiced  the  common  opinion  that 
the  United  States  legal-tender  paper  had  become  so  incor- 
porated into  the  currency  system  and  constituted  so  large  a 
part  of  the  active  circulation  that  it  could  not  be  absolutely 
withdrawn  without  producing  disturbance  both  in  the  fiscal 
operations  of  the  government  and  in  the  business  of  the 
people.  Mr.  Carlisle  consequently  devised  a  plan  for  the 
eradication  of  legal  tenders  without  cancellation ;  this  was 
that  banks  should  deposit  in  place  of  bonds  United  States 
notes  (including  treasury  notes  of  1890)  to  the  amount  of 
30  per  cent,  upon  the  circulation  applied  for.  If  all  the 
national  and  State  banks  in  existence  should  take  out  circu- 
lation to  the  full  amount  proposed,  this  regulation,  it  was 
calculated,  would  tie  up  or  "  put  under  bushel  "  $225,000,000 
of  treasury  notes.  Mr.  Eckels,  the  comptroller  of  the  cur- 
rency, went  a  little  farther  and  proposed  the  deposit  of  as 
much  as  50  per  cent,  of  government  notes  as  a  pledge  of 
bank  circulation. 

Other  proposals  brought  before  Congress,  while  recognizing 
the  desirability  of  relieving  the  government  from  the  embarrass- 


460  Silver  and  the  Tariff.  [§  194 

ments  of  redemption,  did  not  place  so  much  emphasis  upon 
contraction  of  government  currency,  but  looked  especially  to 
greater  elasticity  of  the  banking  currency.  The  Baltimore  plan 
(so  called  because  endorsed  by  the  American  Bankers'  Asso- 
ciation meeting  held  at  Baltimore)  did  away  altogether  with 
the  deposit  of  bonds  for  the  security  of  notes ;  circulation  was 
based  upon  capital ;  emergency  circulation  was  allowed  under 
special  restrictions  of  taxation ;  and  the  security  of  the  note- 
holder was  protected  through  a  guaranty  or  safety  fund,  as  in  the 
former  New  York  State  banking  system  and  present  Canadian 
banking  law.  None  of  these  bills  were  enacted  ;  the  defects 
of  government  note  and  bank  note  circulation  could  command 
little  serious  consideration  in  Congress  as  long  as  party  pas- 
sion was  so  fierce  over  the  silver  question. 

194.    Struggle  for  Free  Coinage. 

Apart  from  and  antagonistic  to  all  these  schemes  of  bank- 
ing reform  stood  the  supporters  of  free  silver.  To  their  minds 
the  way  to  currency  reform  was  clear  and  unconfused  with 
questions  of  reserve,  safety  funds,  elasticity  of  issue,  or  redemp- 
tion ;  the  evil  lay  in  an  inadequate  money  medium,  and  had 
little  to  do  with  banking  or  treasury  finance.  They  held  that 
industry  was  depressed  because  of  the  continued  mint  discrimi- 
nation against  silver,  and  that  it  was  folly  to  discuss  banking 
systems  and  revenue  bills  until  this  fundamental  defect  was 
remedied. 

The  doctrine  that  the  forces  controlling  the  flow  of  specie 
were  universal  in  their  operation  was  impatiently  cast  aside ; 
the  interests  of  Europe  and  the  United  States  were  regarded 
as  radically  different.  By  the  lowering  of  prices  of  agri- 
cultural produce  since  1891,  the  debtor  farmer  found  an 
ever- increasing  difficulty  in  the  payment  of  interest  charges, 
and  the  foreclosure  of  city  and  farm  mortgages  through- 
out the  West  seemed  evidence  of  general  distress.  Sober- 
minded  representatives  arraigned  existing  conditions  :  chains 
of  slavery  laid  upon  labor ;    privileged  classes  more  strongly 


§  194]         Struggle  for  Free  Coinage.  461 

intrenched ;  silver  stricken  down  as  a  co-laborer  with  gold. 
When  told  that  the  treasury  was  in  difficulty,  they  called 
attention  to  the  silver  cash  balance  in  the  treasury.  "  What 
afflicts  the  country  is  a  surplus  and  not  a  want  of  revenue," 
they  said ;  money  was  impounded  in  the  treasury.  The 
industrial  depression  after  1893  made  many  converts  to  this 
idea,  and  the  continued  low  price  of  wheat  convinced  the 
great  agricultural  West  irrespective  of  party  that  its  property 
interests  were  dependent  upon  the  restoration  of  silver;  the 
issue  was  distinctly  presented  to  the  people  in  the  elections  of 
1896.  The  platform  and  the  presidential  candidate  of  the 
Democrats  were  clear  and  outspoken.  "  We  demand  the  free 
and  unlimited  coinage  of  both  gold  and  silver  at  the  present 
legal  ratio  of  16  to  1  without  waiting  for  the  aid  or  consent 
of  any  other  nations."  This  demand,  which  was  first  enun- 
ciated in  a  national  platform  of  the  Greenbackers  in  1880 
and  kept  alive  by  the  Farmers'  Alliance  and  People's  party, 
was  now  accepted  without  reservation  by  one  of  the  old  his- 
toric parties.  The  Republicans  on  the  other  hand  declared 
that  they  were  "  opposed  to  the  free  coinage  of  silver  except 
by  international  agreement  with  the  leading  commercial  na- 
tions of  the  world,  which  we  pledge  ourselves  to  promote." 
Seeing  that  the  existing  gold  standard  would  be  preserved  by 
the  Republicans  till  that  unlikely  event,  an  influential  body  of 
delegates,  under  the  lead  of  Senator  Teller,  seceded  from  the 
Republican  convention,  and  gave  subsequent  support  to  the 
Democratic  candidates.  This  defection  from  the  Republicans 
was  in  turn  offset  by  the  inactivity  of  many  Eastern  Democrats, 
who  had  no  sympathy  either  with  the  Democratic  platform  or 
its  candidate  ;  this  led  to  the  nomination  of  an  independent 
Democratic  ticket  on  a  gold  platform.  The  Populists  also 
entered  vigorously  into  the  campaign.  Although  advocating 
in  their  platform  irredeemable  paper  money  and  the  redemp- 
tion of  the  public  debt  in  this  currency,  for  the  moment  they 
united  in  the  support  of  Mr.  Bryan  for  the  presidency. 

Undoubtedly  other   questions   than    that   of  free    coinage 


462  Silver  and  the  Tariff.  [§  194 

of  silver  influenced  the  minds  of  voters,  such  as  Democratic 
criticism  of  the  judiciary  for  the  income  tax  decision,  but 
the  struggle  centred  on  the  money  question.  An  effort  was 
made  by  Mr.  Bryan  to  rest  the  campaign  on  the  deepest 
passions  of  human  life  :  "  In  this  contest  brother  has  been 
arrayed  against  brother,  father  against  son.  The  warmest  ties 
of  love,  acquaintance,  and  association  have  been  disregarded  ; 
old  leaders  have  been  cast  aside  when  they  refused  to  give 
expression  to  the  sentiments  of  those  whom  they  would  lead, 
and  new  leaders  have  sprung  up  to  give  direction  to  the  cause 
of  truth."  Few  new  arguments  were  presented,  but  the  activ- 
ity in  meetings  and  political  literature  was  unprecedented. 
The  silver  advocates  made  use  of  a  very  effective  medium 
of  argument  by  issuing  millions  of  copies  of  pamphlets,  as 
"  Coin's  Financial  School,"  in  which  well-known  business  men 
in  favor  of  the  gold  standard  were  represented  as  nonplussed 
and  staggered  by  the  simple  conversational  instruction  of  a 
guileless  boy  teacher.  Public  interest  had  never  been  so 
aroused  over  a  financial  question  since  Jackson's  war  on  the 
bank.  For  a  short  time  business  almost  came  to  a  standstill 
because  financial  and  commercial  interests  felt  that  the  possi- 
ble adoption  of  free  coinage  would  make  revolutionary  changes 
in  prices  and  contracts. 

The  elections  were  in  favor  of  the  Republicans,  and  hence 
of  the  gold  standard.  The  continuance  of  a  Republican 
majority  in  the  House  of  Representatives,  however,  did  not 
insure  immediate  positive  action  on  the  money  question,  for 
on  this  point  even  some  of  the  Republicans  who  had  stood 
by  the  party  were  not  in  accord  with  their  own  platform,  and 
soon  it  became  understood  that  upon  any  House  bill  on  the 
currency  the  Senate  would  affix  an  amendment  providing 
"for  the  free  and  unlimited  coinage  of  silver  at  the  ratio 
of  16  to  1  without  the  aid  or  consent  of  any  other  nation." 
This  position  was  tenaciously  held  by  the  Senate  from  1894 
to  1900. 


CHAPTER   XX. 

TARIFF,   WAR,   AND   CURRENCY   ACT. 

195.    References. 

Gold  Reserve:  Finance  Report,  1897,  p.  7;  1898,  p.  10;  1900,  pp. 
14-15.  L.  J.  Gage,  Condition  and  Prospects  of  the  Treasury,  in  No. 
Amer.  Rev.,  vol.  16S  (1899),  pp.  641-653. 

Loans:  Finance  Report,  1898,  pp.  xciii-xcvii  (Spanish  war  loan); 
1900,  pp.  lxxviii-lxxxi,  528;  F.  A.  Vanderlip,  War  Loan,  in  Forum, 
XXVI  (1898),  27-36. 

*  The  Currency:  Finance  Report,  1897,  pp.  lxxii-lxxxi  (Secretary 
Gage),  337-339  (comptroller);  1898,  pp.  xcvii-civ;  1899,  pp.  lxxxviii- 
xcvi;  F.  M.  Taylor,  Quar.  Jour.  Econ.,  XII  (1898),  307-342  (excellent 
bibliography,  p.  342);  Report  of  Monetary  Commission  (1898);  C.  N. 
Fowler,  Forum,  XXII  (1897),  713-721;  R.  M.  Breckenridge,  Comptrol- 
ler's Objections  to  Currency  Reform,  in  Jour.  Pol.  Econ.,  VII,  253-267; 
Economic  Studies,  IV  (Feb.,  1899),  31-44  ;  Report  of  Monetary  Commission, 
in  Bankers'  Magazine,  LVI,  193-201  ;  J.  L.  Laughlin,  Withdrawal  of  the 
\  Treasury  Notes  of  1890,  in  Jour.  Pol.  Econ.,  VI  (1898),  248-249;  O.  A. 
Eliason,  Notts  Issued  on  Assets,  in  Bankers'  Magazine,    LVI,  669-674. 

Tariff:  F.  W.  Taussig,  History  of  the  Tariff,  321-360;  or  Quar. 
four.  Econ.,  XII  (1897),  42-69;  or  Econ.  Jour.,  VII.,  592-598;  C.  A. 
Conant,  in  Review  of  Reviews,  XVI  (1897),  167-174 ;  R.  P.  Porter,  in  No. 
Amer.  Rev.,  vol.  164  (1897),  576-584;  J.  Nimmo,  Jr.,  Forum,  XXIV 
(1897),  159-172  (transit  trade) ;  H.  W.  Wiley,  Tariff  on  Sugar,  in  Forum, 
XXIV  (1898),  689-697  ;  Stanwood,  II,  360-390. 

Currency  Act  of  1900;  Finance  Report,  1900,  pp.  xxxi-xxxiv,  473- 
477;  F.  W.  Taussig,  Quar.  Jour.  Econ.,  XIV  (1900),  394-415,  450  (text) ; 
or  Econ.  Jour.,  X  (1900),  226;  J.  L.  Laughlin,  Recent  Monetary  Legisla- 
tion, in  Jour.  Pol.  Econ.,  VIII  (1900),  289-302 ;  C.  A.  Conant,  Refunding 
Law  in  Operation,  in  Review  of  Reviews,  XXI  (1900),  71 1-7 16;  J.  F. 
Johnson,  Bankers'  Journal  (Chicago),  VII  (1901),  53-63;  J.  F.  John- 
son, Pol.  Sci.  Quar.,  XV  (1900),  482-507  ;  R.  P.  Falkner,  Currency  Law 
of  1900,  in  Annals  Amer.  Acad.,  XVI  (1900),  33-49;  F.  A.  Vanderlip, 
Forum,  XXIX  (1900),  129-138. 

196.     Dingley  Tariff,  1897. 

Although  the  industrial  outlook  had  begun  to  brighten 
when  the  Republicans  assumed  control  in  March,  1897,  the 

463 


464       Tariff,  War,  and  Currency  Act.     [§  196 

condition  of  the  national  treasury  was  unsatisfactory.     After 
1893  the  annual  deficits  were  as  follows:  — 

1893-1894 $69,800,000 

1894-1895 42,800,000 

1895-1896 25,200,000 

1896-1897 18,000,000 

To  the  Republican  leaders  there  could  be  but  one  cause, 
the  inadequacy  of  the  tariff  of  1894,  and  there  could  be  but 
one  remedy, —  another  revision  under  Republican  guidance 
and  responsibility.  Little  respect  was  given  to  the  plea  that 
as  long  as  the  currency  was  unsound,  no  tariff  could  bring 
much  comfort ;  nor  was  any  respect  paid  to  the  claim  that 
the  tariff  was  not  the  principal  issue  in  the  elections  of 
1896.  Promptly  after  inauguration  in  March,  1897,  Presi- 
dent McKinley  called  an  extra  session  of  Congress  to  consider 
the  need  of  further  revenue.  A  bill  was  reported  from  the 
committee  on  ways  and  means  under  the  chairmanship  of  Mr. 
Dingley,  and  after  a  brief  consideration  in  the  House,  a  more 
leisurely  discussion  in  the  Senate,  and  conference  between  the 
two  Houses,  resulting  in  the  usual  compromise,  it  became  a 
law,  July  24,  1897.  The  measure  was  thoroughly  protective 
in  its  provisions,  but  when  it  is  remembered  that  the  Wilson 
tariff  of  1894  was  also  of  the  same  general  character,  an 
analysis  of  the  new  tariff  will  not  disclose  many  points  of 
interest.  On  some  commodities  the  duties  of  1890  were 
restored;  on  others  compromises  between  the  rates  of  1890 
and  1894  were  accepted,  and  in  a  few  instances  the  lower 
rates  of  the  Wilson  tariff  were  allowed  to  stand.  Duties  were 
re-imposed  on  wool,  increased  on  flax,  cotton  bagging,  wool- 
lens, silks,  and  linens,  and  on  certain  manufactures  of  iron 
and  steel.  On  coal  there  was  a  compromise  ;  on  iron  and 
steel,  duties  were  left  practically  unchanged.  On  sugar,  which 
plays  a  more  important  part  from  a  fiscal  point  of  view,  there 
was  a  radical  revision ;  in  place  of  the  ad  valorem  rate  of 
40  per  cent,  on  raw  sugar,  the  duty  was  increased  and  made 
specific.     The  policy  of  free  raw  sugar  adopted  by  the  Repub- 


§  !97]  Spanish  War  Finance.  465 

lican  party  in  1890  was  definitely  abandoned,  for  the  need  of 
revenue  was  urgent,  and  the  slowly  developing  beet  sugar 
industry  demanded  protection. 

The  principle  of  reciprocity  authorized  by  the  McKinley 
tariff  was  again  incorporated  into  the  tariff  system,  but  was  to 
be  brought  into  operation  by  treaties  executed  by  the  Senate, 
instead  of  by  executive  proclamation  as  provided  in  the  act  of 
1890.  The  declared  policy  of  the  Republican  party  is  that 
these  treaties  shall  in  no  way  infringe  upon  the  principle  of 
protection,  but  shall  be  "  so  directed  as  to  open  our  markets 
on  favorable  terms  for  what  we  do  not  ourselves  produce  in 
return  for  free  foreign  markets."  To  make  a  treaty  which 
will  not  in  some  degree  modify  the  protective  policy  is  a 
problem ;  and  there  are  those  who  confidently  expect  that 
this  country  will  gradually  arrive  at  a  greater  measure  of  free 
trade  through  reciprocity. 

Although  the  congressional  debates  on  the  Dingley  tariff 
were  devoted  largely  to  pictures  of  the  industrial  prostration 
due  to  previous  relaxation  of  the  protective  principle,  the 
majority  keenly  appreciated  the  needs  of  the  treasury  and 
gave  more  than  usual  attention  to  making  it  productive  of 
revenue.  The  real  merits  of  the  Dingley  bill  on  this  point 
were  obscured  by  the  war  with  Spain  in  1898,  which  in- 
terrupted commerce  and  business,  and  compelled  recourse  to 
internal  revenue  legislation.  In  fact  it  is  hard  to  analyze  the 
productivity  of  the  several  tariffs  of  1890,  1894,  and  1897, 
partly  because  the  currency  contest  depressed  business,  and 
partly  because  there  was  never  time  enough  to  determine  the 
real  effect  of  the  several  measures.  Industry  cannot  accommo- 
date itself  at  a  moment's  notice  to  changes  of  tariff  schedules, 
and  in  each  case  the  time  was  too  brief  to  allow  a  safe  gener- 
alization on  the  fiscal  merits  of  the  several  measures. 

197.     Spanish  War  Finance. 

The  course  of  financial  reorganization  was  interrupted  early 
in  1898  by  the  war  with  Spain.     The  action  of  the  treasury 

3° 


466       Tariff,  War,  and  Currency  Act.     [§  197 

and  of  Congress  in  this  crisis  was  alike  commendable  :  as 
soon  as  the  possibility  of  war  became  apparent,  Congress 
unanimously  appropriated  $50,000,000  for  national  defence, 
to  be  expended  without  restriction  by  the  president.  The 
loan  act  was  supplemented  by  the  war  revenue  bill  of  June 
13,  1898.  The  recent  tariff  measure  was  not  disturbed,  and 
reliance  was  placed  almost  wholly  upon  new  internal  revenue 
duties.  Nearly  all  of  the  taxes  on  tobacco  and  fermented 
liquors  were  doubled  ;  but  no  change  was  made  in  the  duties 
on  spirits,  thus  leaving  a  fruitful  source  of  revenue  in  reserve 
for  future  emergency.  Special  taxes  were  laid  upon  banks, 
brokers,  proprietors  of  theatres,  bowling  alleys,  billiard  and 
pool  rooms,  and  amusement  places  in  general.  Stamp  taxes 
were  imposed  upon  a  great  variety  of  commercial  transac- 
tions, involving  the  use  of  documents,  as  the  issue  or  sale  of 
corporation  securities ;  upon  bank  checks,  bills  of  exchange, 
drafts,  etc. ;  upon  express  and  freight  receipts,  telephone  and 
telegraph  messages,  insurance  policies  and  many  other  busi- 
ness operations  in  daily  use.  Duties  collected  through  the  use 
of  stamps,  were  laid  upon  patent  and  proprietary  medicines 
and  toilet  articles,  chewing  gum  and  wines ;  and  an  excise 
tax  was  imposed  upon  firms  engaged  in  refining  sugar  or 
petroleum.  A  novelty  in  federal  finance  was  a  tax  on  lega- 
cies, ranging  from  three-quarters  of  1  per  cent,  on  direct  heirs 
to  5  per  cent,  on  distant  relations  and  strangers,  with  a  pro- 
gressive increase  in  the  rates  as  the  estates  increased  in  size, 
to  a  maximum  of  15  per  cent.  The  productivity  of  the  new 
taxes  is  seen  in  the  following  condensed  table  :  — 


1898 

1899 

1900 

1901 

Distilled  spirits  .... 
Manufactured  tobacco     . 
Fermented  liquors .     .     . 
Inheritance  taxes    .     .     . 
Stamp  and  business  taxes 
(Schedules  A  and  B)    . 
Miscellaneous    .... 

$92,500,000 
36,200,000 
39,500,000 

2,600,000 

$99,200,000 

52,400,000 

68,600,000 

1,200,000 

43,800,000 
8,200,000 

$109,800,000 

59,300,000 

73,500,000 

2,800,000 

40,900,000 
9,000,000 

$116,000,000 

62,400,000 

75,600,000 

5,200,000 

39,200,000 
8,000,000 

Total 

$170,800,000 

$273,400,000 

$295,300,000 

$306,800,000 

§  197]  Spanish  War  Finance.  467 

Under  the  authority  to  borrow,  conferred  by  the  act  of 
June  13,  1898,  $200,000,000  of  3  per  cent,  bonds  were 
sold.  Any  doubt  whether  a  bond  bearing  so  low  a  rate  of 
interest  could  be  advantageously  placed  under  the  existing 
sensitive  conditions  of  trade  and  finance  disappeared  as  soon 
as  the  treasury  invited  subscriptions.  A  popular  loan  was  effec- 
tively secured  by  issuing  the  bonds  in  denominations  as  low  as 
$20,  and  in  giving  priority  in  the  allotment  to  subscribers  for 
the  lowest  amounts.  In  all  there  were  232,224  subscriptions 
for  $500  and  less,  accompanied  by  a  full  payment  for  the 
bonds ;  and  88,002  bids  for  larger  amounts.  The  total  sub- 
scription amounted  to  $1,400,000,000.  The  success  of  this 
loan  was  due  partly  to  sentiment,  as  a  patriotic  desire  to 
share  in  the  financial  support  of  the  war;  and  partly  to  the 
self-interest  of  the  national  banks,  which  were  eager  to  obtain 
additional  bonds  to  secure  circulation.  The  "  popular  loan," 
however,  was  floated  at  a  probable  sacrifice  of  about  $5,000,- 
000  which  would  have  come  as  a  premium  from  competitive 
bidding ;  and  the  theory  that  "  the  dissemination  of  govern- 
ment securities  among  the  people  would  attach  the  holders 
thereof  by  closer  bonds  of  sympathy  to  the  government,"  was 
weakened  by  the  rapid  sale  of  bonds  at  a  small  profit  by  the 
original  subscribers.  Within  a  few  months  the  original  hold- 
ings of  about  116,000  subscribers  passed  into  the  possession 
of  a  comparatively  few  persons  and  corporations. 

The  cost  of  the  war  is  not  easily  estimated.  The  actual 
expenditure  during  the  four  months  of  hostilities  was  not  large, 
but  the  ultimate  outlays  have  made  an  enormous  difference  in 
the  nation's  budget.  During  the  four  preceding  years  of 
peace,  1 894-1 897,  the  expenditures  for  the  army  were  $206,- 
000,000  and  for  the  navy,  $122,000,000,  a  total  of  $328,- 
000,000;  while  during  the  succeeding  years,  1898-1901,  the 
expenditures  for  the  army  reached  $603,000,000  and  the  navy 
$238,000,000,  making  a  total  of  $842,000,000.  A  portion  of 
this  expense  is  to  be  charged  to  the  campaign  in  China  and 
the  restoration  of  peace  in  the  Philippines,  operations  which 


468       Tariff,  War,  and  Currency  Act.     [§  198 

are  consequent  upon  the  Spanish  War.  The  permanent  result 
must  be  a  higher  level  of  expenditures  for  military  and  naval 
purposes,  and  probably  a  higher  per  capita  tax  for  all  federal 
purposes.  Eventually  new  pensions  are  likely  to  become  a 
large  draft  on  the  treasury. 

198.     Currency  Act  of  1900. 

The  war  was  quickly  over,  and  although  new  and  difficult 
problems  of  colonial  administration  engaged  the  attention  of 
the  country,  the  need  of  reforming  the  currency  and  banking 
was  not  forgotten.  At  first  the  outlook  was  discouraging : 
early  in  1898  the  Senate  passed  a  resolution  that  government 
bonds  were  payable  in  standard  silver  dollars  at  the  option  of 
the  government  with  no  violation  of  public  faith ;  and  shortly 
afterward  the  silver  element  in  the  Senate  forced  the  incorpora- 
tion of  a  silver  coinage  provision  (section  34)  into  the  war 
revenue  act,  directing  'the  secretary  of  the  treasury  to  coin 
into  standard  silver  dollars,  to  an  amount  not  less  than  $1,500,- 
000  each  month,  all  of  the  silver  bullion  in  the  treasury, 
purchased  in  accordance  with  the  act  of  1890.  The  advo- 
cates of  reform,  however,  were  not  idle.  Outside  of  Congress, 
a  group  of  men  known  as  the  Indianapolis  Monetary  Com- 
mission had  been  organized  in  1897  through  the  action  of  a 
convention  of  representatives  of  chambers  of  commerce  and 
boards  of  trade,  particularly  of  the  Middle  West.  This  com- 
mission made  a  preliminary  report  in  December,  1897,  and  in 
January,  1898,  a  bill  embodying  its  proposals  was  introduced 
into  the  House  of  Representatives  by  Mr.  Overstreet  of  Indiana. 
This  plan  provided  for  gold  to  be  the  sole  standard  of  value; 
the  stoppage  of  the  coinage  of  silver  dollars ;  a  division  in  the 
treasury  department  between  the  funds  received  and  used 
for  current  expenditures,  and  those  used  for  issue  and  redemp- 
tion of  treasury  notes ;  the  retirement  of  the  demand  obliga- 
tions of  the  government ;  and  a  radical  change  in  the  national 
banking  system.  The  activity  of  this  commission,  and  the 
thoroughness  of  its  report,  established  a  centre  of  persistent 


§199]  Redemption  of  Notes.  469 

and  aggressive  influence  in  Congress  and  set  before  reformers 
a  reasonable  goal.  The  improvement  in  industrial  conditions 
was  encouraging ;  foreign  commerce  was  expanding  enor- 
mously, and  new  records,  both  of  imports  and  exports,  were 
reached.  Harvests  were  generous  and  manufacturers  were  be- 
hindhand with  their  orders.  The  revenues  of  the  government 
were  abundant,  in  spite  of  the  war  with  Spain,  and  there  was 
little  complaint  of  the  new  taxes.  The  world's  annual  product 
of  gold  exceeded  all  previous  figures  and  removed  any  reason- 
able apprehension  of  scarcity  of  gold;  hence  the  argument 
for  bimetallism  lost  practical  weight. 

The  struggle  for  currency  reform  was  still  prolonged,  but 
on  March  14,  1900,  a  gold  standard  or  currency  law  was 
enacted.  The  important  provisions  of  the  law  are  three : 
First,  gold  is  declared  to  be  the  standard,  and  it  is  made  the 
duty  of  the  secretary  of  the  treasury  to  maintain  at  parity  with 
gold  all  other  forms  of  money :  this  parity  is  not  to  rest  on  a 
mere  declaration ;  fiscal  machinery  is  provided  by  means  of 
which,  within  certain  limits,  the  redemption  of  government 
notes  in  gold  may  be  automatically  continued  without  special 
legislation.  Second,  the  circulation  of  national  banks  is 
made  more  profitable,  and  opportunity  is  given  for  the  ex- 
tension of  the  banking  system  to  smaller  towns  and  institu- 
tions ;  and  third,  authority  was  given  for  the  refunding  of  a 
large  portion  of  the  public  debt  at  a  low  rate  of  interest.  The 
measure  was  a  compromise,  for  the  silver  advocates  in  the 
Senate  still  had  to  be  reckoned  with,  and  even  the  reformers 
were  not  agreed  on  all  points.  In  view  of  the  approaching 
presidential  campaign  in  which  silver  was  again  to  be  the 
supreme  issue,  it  is  probable  that  the  act  went  as  far  as  con- 
ditions would  warrant. 

199.    Redemption  of  Treasury  Notes. 

Two  changes  were  introduced  to  secure  the  better  main- 
tenance of  the  gold  standard  and  an  unquestioned  redemption 
of  credit  notes ;  the  gold  reserve  was  enlarged  so  as  to  stand 


47°       Tariff,  War,  and  Currency  Act.     [{ 


i99 


at  the  outset  at  $150,000, 000  ;  and  authority  was  given  for 
the  sale  of  short-term  bonds  whenever  in  the  future  the 
ordinary  receipts  of  gold  should  not  be  adequate  to  maintain 
the  reserve  at  a  level  of  at  least  $100,000,000.  That  there 
may  be  no  doubt  as  to  the  resources  of  the  treasury,  the 
reserve  is  made  a  specific  and  separate  account  in  treasury 
book-keeping,  so  that  it  is  now  possible  to  distinguish  between 
the  general  fund  of  the  treasury  and  that  set  aside  for  the 
redemption  of  credit  money. 

The  machinery  for  maintaining  the  current  integrity  of  the 
reserve  is  effective,  though  clumsy.  If  there  be  no  gold  avail- 
able in  the  general  fund  the  notes  which  are  presented  for 
redemption  must  be  retained  until  the  gold  reserve  is  made 
good,  so  that  the  sum  total  of  gold  and  notes  may  equal 
£  1 50,000,000 ;  if  the  volume  of  gold  should  then  fall  below 
$100,000,000,  the  gold  reserve  is  to  be  restored  by  the  sale 
of  one-year  three  per  cent,  bonds.  Under  the  conditions  of 
this  complicated  and  roundabout  method,  it  is  clear  that 
though  the  gold  reserve  may  be  drawn  down  from  $150,000,- 
000  to  $100,000,000,  $50,000,000  of  notes  will  be  locked  up 
in  the  reserve  fund  and  withdrawn  from  circulation ;  and  the 
operations  of  the  endless  chain  will  so  far  forth  be  weakened. 
At  the  time  of  the  passage  of  the  act,  the  sum  of  the  United 
States  notes  and  the  treasury  notes  of  1890  was  $437,000,000, 
and  the  reserve  of  $150,000,000  was  therefore  equal  to  34  per 
cent.  During  the  period  1879-1890,  the  reserve  of  $100,000,- 
000  to  protect  $346,000,000  of  United  States  notes  was  equal 
to  29  per  cent. ;  and  in  1893  when  $153,000,000  of  the  new 
treasury  notes  had  swollen  the  credit  money  to  a  grand  total  of 
$500,000,000,  the  reserve  amounted  to  but  20  per  cent. 

Although  the  act  of  1900  increases  the  reserve,  the  obliga- 
tion to  maintain  silver  at  a  parity  with  gold  has  increased  the 
burden  which,  under  certain  contingencies,  the  gold  reserve 
may  be  called  upon  to  support.  As  yet,  however,  the  pros- 
perity of  the  government  has  been  so  great  that  there  is  no 
apprehension  of  difficulty  from  this  source,  and  the  possibility 


§  2oo]  National   Banks.  471 

of  danger  in  the  future  is  lessened  on  account  of  changes  in 
the  character  of  the  paper  issues.  Whenever  treasury  notes 
of  1890  are  redeemed,  silver  dollars  only  will  be  issued  in 
their  place  :  silver  certificates  take  the  place  of  United  States 
notes  hitherto  issued  in  denominations  of  less  than  ten  dollars, 
and  according  to  the  act  not  more  than  one-third  of  the  out- 
standing notes  of  a  national  bank  are  to  be  in  denominations 
of  five  dollars.  These  provisions  will  tend  to  enlarge  the  use 
of  silver  and  silver  certificates  in  retail  trade ;  and  so  broad 
is  the  territory  of  trade  and  so  constant  the  demand  for  small 
bills,  that  it  will  be  difficult  to  gather  together  quickly  a  dan- 
gerous amount  of  silver  or  its  certificates  for  exchange  into 
gold  at  the  government  counter. 

200.    National  Banks. 

Under  the  new  act  a  national  bank  may  be  organized  with  a 
capital  of  $25,000  in  a  town  with  a  population  not  exceeding 
3000.  Circulation  is  increased  to  the  full  face  value  of  bonds 
deposited,  so  long  as  they  stand  at  or  above  par ;  and  if  new 
refunding  bonds  were  deposited  before  a  prescribed  date  to 
secure  circulation,  the  tax  on  circulation  is  reduced  to  one- 
half  per  cent,  per  annum.  The  privileges  thus  granted  led  to 
an  increase  in  the  establishment  of  banking  institutions  and 
to  an  enlarged  circulation.  By  October  31,  1906,  the  number 
of  national  banks  increased  from  3617  to  6225  ;  of  the  3157 
new  banks  organized,  2062  had  a  capital  of  less  than  $50,000  ; 
352  of  these  organizations  represented  institutions  which  had 
been  pie-existing  private  or  State  banks.  The  circulation 
of  the  national  banks  increased  from  $254,000,000,  March 
14,  1900,  to  $583,000,000,  October  31,  1906.  This  has  en- 
larged the  credit  facilities  of  the  country,  but  owing  to  the 
restrictive  regulations  governing  the  retirement  of  circulation, 
and  the  narrow  basis  of  circulation  upon  federal  bonds,  the 
monetary  system  has  not  been  made  much  more  elastic  ;  as  a 
reform  for  making  the  note  issue  more  elastic,  the  Act  of  1900 
is  not  of  great  service. 


47 2       Tariff,  War,  and  Currency  Act.     [§  201 

With  the  great  expansion  of  business  during  the  last  few 
years,  including  the  demands  of  ordinary  trade  and  commerce, 
and  the  necessities  of  corporate  finance,  the  strain  upon  the 
money  market  has  been  at  times  severe  and  the  results  critical. 
It  has,  however,  been  impossible  to  secure  any  radical  change 
in  the  basis  of  note  issues,  largely  due  to  the  fear  of  encourag- 
ing speculative  credit  undertakings.  A  slight  measure  of  relief 
was  secured  by  the  law  of  1907  whereby  the  limit  of  retirement 
of  bank  notes  is  extended  from  $3,000,000  to  $9,000,000  per 
month  ;  a  large  increase  in  the  issue  of  notes  of  small  denom- 
inations is  also  provided  for. 

201.    Refunding. 

The  refunding  provisions  of  the  act  of  1900  authorized  the 
secretary  of  the  treasury  to  refund  into  new  thirty-year  two 
per  cent,  gold  bonds  the  outstanding  three  per  cents,  of  1908 
(Spanish  war  loan),  the  four  per  cents,  due  in  1907,  and  the 
five  per  cents,  due  in  1904,  a  total  of  $839,000,000.  In  tak- 
ing up  bonds  not  yet  due,  no  higher  price  was  paid  than  a 
capital  value  on  the  basis  of  a  two  and  a  half  per  cent, 
return  ;  the  new  two  per  cents,  were  issued  at  par,  but  only 
in  exchange  for  the  old  bonds  refunded,  as  they  fell  due  or 
as  holders  agreed  to  surrender  them ;  and  authority  was  given 
to  the  secretary  of  the  treasury  to  pay  in  money  the  premium 
on  the  old  bonds  refunded. 

The  success  of  a  voluntary  refunding  scheme  in  anticipation 
of  the  term  fixed  in  the  bond  always  depends  on  the  induce- 
ments to  bondholders  to  make  the  exchange.  In  this  instance 
there  was  a  small  compensatory  premium  in  cash  and  an 
indirect  but  ingenious  incentive  was  devised  to  interest  banks 
in  the  success  of  the  scheme ;  banks  which  accepted  new  for 
old  bonds  as  a  deposit  to  secure  circulation,  were  relieved  of 
one-half  of  the  tax  on  circulation,  and  this  in  addition  to  the 
advantage  of  prolonging  the  note  circulation  by  the  possession 
of  long-time  bonds  instead  of  those  subject  to  a  speedy  sur- 
render brought  the  banks  into  an  active  co-operation. 

The  gain  to  the  government  is  not  so  clear  or  complete : 


§  202]         Receipts  and  Expenditures.  473 

to  be  sure  a  more  permanent  provision  was  made  for  the  in- 
debtedness which  fell  due  within  seven  years  of  the  act ;  and 
there  was  a  considerable  saving  in  the  interest  charges.  In 
return  for  these  advantages,  the  government  has  hampered 
itself  with  conditions  in  the  payment  of  its  debt  which  will 
prove  troublesome  when  there  is  a  succession  of  treasury 
surpluses ;  and  the  saving  in  interest  is  largely  offset  by  the 
premiums  paid  by  the  government  on  bonds  not  due.  It  was 
calculated  in  1900,  that  the  substitution  of  $850,000,000  of 
two  per  cents.,  on  the  terms  proposed,  would  give  to  the  gov- 
ernment a  net  profit  of  about  $23,000,000.  Between  the 
passage  of  the  act  and  December  31,  1900,  $445,940,750  of 
bonds  were  so  funded;  the  premium  paid  was  $43,582,000, 
and  the  saving  of  interest  was  $54,548,000.  If  no  reckoning 
be  made  of  the  circulation  tax  surrendered,  the  net  saving  to  the 
treasury  on  the  exchange  mentioned,  amounts  to  $10,966,000. 
Certainly  the  opportunity  for  payment  of  the  debt  has  been 
too  long  deferred,  as  is  illustrated  in  the  current  purchases  of 
bonds  at  high  premiums.  It  is  fair  to  conclude  that  the  fund- 
ing scheme  was  intended  rather  to  relieve  the  difficulties  of 
banking  than  to  offer  the  best  possible  management  of  the 
finances  over  a  long  series  of  years. 

The  changes  in  the  character  of  the  debt,  1891-1901,  are 
shown  in  the  table  on  page  474;  and  the  debt,  1902-1906, 
unclassified,  on  page  476. 

202.    Receipts  and  Expenditures,  1891-1901. 

The  ordinary  receipts  during  the  years  1 899-1 901  were 
beyond  all  expectation,  the  customs  and  internal  revenue  each 
being  in  excess  of  the  amount  for  any  three  previous  con- 
secutive years.  The  ease  with  which  these  enormous  sums 
were  paid  is  a  striking  illustration  of  the  growth  of  the  country 
in  a  single  generation.  The  internal  revenue  amounted  to 
i,ooo,ooo  as  compared  with  $785,000,000  in  the  earlier 


474       Tariff,  War,  and  Currency  Act.    [§  202 


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300,000000  — 


200,000000 


100,000000  -  - 


Miscellaneous 

►nternal  Revenue  PI 
Direct  Tax 
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No.   XVII.  — ORDINARY   RECEIPTS,    1861-1901. 

(Continuation  of  Chart  No.  5.  different  scale.' 


§  2°2] 


Receipts  and  Expenditures.  4/5 


years  1865-186 7,  when  industry  and  business  were  burdened 
with  every  variety  of  excise  which  could  be  devised ;  while 
the  later  taxes  occasioned  annoyance  and  in  some  instances 
friction,  there  wr.s  little  sense  of  sacrifice  on  the  part  of  the 
public.  In  1 90 1  the  Spanish  war  taxes  were  partially  repealed, 
and  by  the  act  of  April  12,  1902,  entirely  removed.  By  years 
the  receipts  from  1891  to  1906  were  as  follows  :  — 


Internal 
Revenue 

Other 

Total  net 

ordinary 

1891 

$219,522,000 

$145,686,000 

$27,404,000 

$393,612,000 

1892 

177,452,000 

153,971,000 

23,514,000 

:-54.937.ooo 

1893 

203,355,000 

161,027,000 

21,437,000 

385,819.000 

1894 

131,818,000 

147,111,000 

18,793,000 

397,722,000 

1895 

152,158,000 

143,421,000 

17,811,000 

S'S.Soo.ooo 

I  >,/.) 

160,021,000 

146,762,000 

20,193,000 

326,976,000 

1897 

176,554,000 

146,688,000 

24.479.ooo 

347,721,000 

1898 

149,575,000 

170,900,000 

84,846,000' 

405,321,000 

1899 

206,128,000 

273  i437.ooo 

36,395,000 

515,960,000 

1900 

233,164,000 

295.327.ooo 

38,749,000 

507,240,000 

1901 

238,585,000 

307,150,000 

41 ,920,000 

587,685,000 

1902 

254,445,000 

271,880,000 

36,153,000 

562,478,000 

•9°3 

284,480,000 

230,810,000 

45,107,000 

560,397,000 

1904 

261,275,000 

232,904,000 

46,453,000 

540,632,000 

1905 

261,799,000 

234,096,000 

48,380,000 

544,275,000 

1906 

300,252,000 

249,150,000 

45,052,000 

594,454.°°° 

1  $64,000,000  received  from  sale  of  Kansas  Pacific  Railroad  and  Union  Pacific  Railroad. 

Expenditures  by  years,  1891-1905,  were  as  follows:  — 


1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 

«9°3 
1904 
1905 


Navy 


720,000 
895,000 
641,000 

567,000!  31 

804,000'  28 

830,000  27 

950,000!  34 

992,000  58 

841,000  63, 

774.000  55, 

615,000  60 

272,00c!  67, 

,620,000  82 
035,0001102 

175,000  117 


113,000 
174,000 
136,000 
701,000 
797,000 
147,000 
561,000 
,823,000 
942,000 
,953,000 
,506,000 
,803,000 
,618,000 
,956,000 
,550,000 


Pensions 


$124,415,000 
134,583,000 
i59.357.ooo 
141,177,000 
141,395,000 
« 39.434.ooo 
141,053.000 
147,452,000 

•39.394.ooo 
140,877,000 
139,321,000 
138,489,000 
138,426,000 

«42.559>°oo 
141,774,000 


Interest 
on  debt 


$37,547,000 
23.378,000 
27,264.000 
27,841,000 
30,978,000 
35,385,000 
37.79i.oooj 
37,585,000 
39,896,000 
40,160,000 
32,342,000 
29,108,000 
28,556,000 
24,646,000 
24,591,000 


Indians 


$8,527,000 
11,150,000 
'3345.ooo 
10,293,000 
9.939.754 
12,165,000 
13,016,000 
10,994,000 
12,805,000 
10,175,000 
io,>k/>.ooo 
10,050,000 
12,935,000 
10,438,000 
14,236,000 


Miscella- 
neous 


$110,048,000 
99,84 1 ,000 
» °3 .732.000 
10 1 .943.000 
93.279.ooo 
87,216,000 
90,401,000 
96,520,000 
119,191,000 

io5,773>oo° 
122,782,000 
113,469,000 
124,944,000 
186,767,000 
1 4°.953.ooo 


Total 


$355,372.°°° 
345,023,000 
383,477.000 
367,524,000 
356,195,000 
35<,i7g,coo 
365.774,000 
443.368,000 
605,071,000 
487,713.0°° 
509.966,000 
471,191,000 
506,099,000 
583,402,000 
567,279,000 


4.76       Tariff,  War,  and  Currency  Act.     rs  202 

Some  of  the  principal  expenditures  under  "  Miscellaneous  " 
are  presented  in  table  in  the  Appendix.  Within  the  term  of  a 
single  Congress,  expenditures  now  amount  to  a  billion  of  dol- 
lars, and  a  comparison  of  the  principal  items  for  1905  and 
1 89 1  shows  that  this  is  largely  due  to  the  demands  of  the 
military  and  naval  establishments  and  pensions. 

A  comparison  of  ordinary  receipts  and  expenditures  is 
shown  in  the  following  table  in  millions  of  dollars  :  — 


Receipts 

Expen- 
ditures 

Surplus 

Deficit 

Taxes 

Other 

Total 

1890 

1891 
1892 
1893 
1894 

189s 

1896 

1897 

1898 
1899 
1900 
1 901 
1902 
i9°3 
1904 

•9°5 

372-3 

365.2 

331-4 
364-4 
278.9 
295.6 
306.8 
323-2 
320.5 
4796 
528.5 
545.8 
526.3 
5'5-3 
494.2 
495-9 

30.8 
27-4 
23-5 

21-5 

18.8 

.7.8 

20.2 
24-5 

84  9 
36-4 
38.8 
41.9 
36.2 
45.1 
46.5 
48.4 

403.1 
392-6 
354-9 
385.8 

297-7 
313-4 
3270 
347  7 
405  3 
516.0 
5672 
5877 
563-4 
5604 
540.6 

544-3 

297.7 
355-4 
345-° 
3S3.5 
367-5 
356.2 
352-2 
365.8 
443-4 
605.1 
487.7 
510.0 
471.2 
506.1 
5834 
567-3 

105.4 

37-2 

9.9 

23 

79-5 
77-7 
9>-3 
54-3 

69.8 
42.8 
25.2 
18. 1 

38.1 
89.1 

42.8 

23.0 

The  total  debt,   less  cash   in  the   treasury,   for  the  years 
1902-1906,  is  as  follows  —  in  millions  of  dollars:  — 

1902 $969-5 

1903 925.0 

1904 967-2 

1905 989-9 

1906 964-4 

Nearly  two-thirds,  $596,000,000,  of  the  total  indebtedness 
in  1906,  bore  interest  at  the  low  rate  of  two  per  cent. 


1861 


-,      1365 


O   > 


=.    73 

2     P3 

I   n 


g.    PI 
£    2! 


1890 


^8 


1900 


! I L_ 


CHAPTER  XXI. 

LEGISLATION   AND   ADMINISTRATION. 

203.     References. 

Appropriations  :  Finance  Report,  1894,  pp.  lxvii,  837,  838  (specific 
and  permanent) ;  J.  A.  Garfield,  Works,  II,  1-19  (Jan.  23,  1872),  740- 
753  (!879);  E.  D.  Adams,  The  Control  of  the  Purse  of  the  U.  S.,  in 
Kansas  Univ.  Quarterly,  April,  1894;  J.  Sherman,  Recollections,  I,  154; 
Bolles,  III,  227-240,  536-560;  H.  C.  Adams,  Finance,  121-132,  150-153, 
157-160;  F.  J.  Goodnow,  Comparative  Administrative  Law,  II,  291-295; 
W.  M.  Daniels,  Public  Pittance,  348-359 ;  L.  G.  McConachie,  Congres- 
sional Committees,  175-185,  233,  373-387  ;  A.  B.  Hart,  Practical  Essays  on 
American  Government,  206-232  (river  and  harbor  bill ;  see  note  p.  232) ; 
E.  R.  Johnson,  Appropriations  for  River  and  Harbor  Bills,  in  Annals 
Amer.  Acad.,  II,  782-811;  R.  Ogden,  The  Rationale  of  Congressional 
Extravagance,  in  Yale  Review,  VI,  37-49;  E.  I.  Renick,  Control  of 
National  Expenditures,  in  Pol.  Sci.  Quar.,  VI  (1891),  248-281;  N.  H. 
Thompson,  Control  of  National  Expenditures,  in  Pol.  Sci.  Quar.,  VII 
(1892),  467-482. 

Treasury  Department:  Report  of  the  Select  Committee  of  the  U.  S. 
Senate,  50th  Cong.,  1st  Sess.,  Senate  Report,  No.  507, 1888.  Vols.  I— III ; 
see  especially  I,  4-25,  130-133,  145-15°.  235-238;  II,  1-474  (treats  par- 
ticularly of  accounting) ;  L.  J.  Gage,  Organization  of  Treasury  Depart- 
ment, in  Cosmopolitan,  XXV  (1898),  355;  R.  Mayo,  The  Treasury  De- 
partment (Washington,  1847);  H.  C.  Adams,  Finance,  193-201;  C.  C. 
Plehn,  Public  Finance,  334-339;  F.  A.  Cleveland,  Funds  and  their  Uses, 
195-208  (the  maintenance  of  the  reserve). 

Customs  Administration:  Finance  Report,  1890,  pp.  xxxii-xxxvii ; 
1891,  pp.  xxxviii-xlii ;  1892,  pp.  xxxvii-xxxix ;  1893,  p.  xli  (expense); 
1S94,  pp.  xxxix,  959,  962-966  (expense) ;  1895,  pp.  737-738  (undervalua- 
tion); 1898,  pp.  xliv-xlv,  868-876  (appraisement);  Reports  of  Board  of 
Appraisers,  published  annually  in  Finance  Report,  1892-1898 ;  now  sepa- 
rately; Hearings  on  Administrative  Customs  Laws  before  the  Committee 
on  Ways  and  Means  (Washington,  1896);  Report  of  the  Secretary  of  the 
Treasury  on  Collection  of  Duties,  in  Finance  Report,  1885,  Vol.  II;  ditto, 
1886,  Vol.  II ;  J.  D.  Goss,  The  History  of  the  Tariff  Administration  in 
the  U.  S.,  in  Columbia  College  Studies  in  History,  etc.,  I,  No.  2;  F.  J. 
Goodnow,  The  Collection  of  Duties  in  the  U.  S.,  in  Pol.  Sci.  Quar.,  I 
(1886),  36-44;  E.  J.  Shriver,  How  Customs  Duties  Work,  in  Pol.  Sci. 
Quar.,  II   (1887),   265-273;  Bolles,  II,  486-50 1 ;   III,  489-522;   C.  S. 

477 


478       Legislation  and  Administration.     [§  204 

Hamlin,  The  Customs  Administrative  Act,  in  No.  Amer.  Rev.,  Vol.  158, 
pp.  222-230;  W.  C.  Ford,  Official  Tariff  Comparisons,  in  Pol.  Sci. 
Quar.,  XIII  (1890),  273-285;    Yale  Review,  I,  233-235  (tariff  statistics). 

Custody  of  the  Public  Funds:  Finance  Report.  1900,  p.  xxviii ; 
D.  Kinley,  Independent  Treasury  System,  chs.  6-7;  J.  B.  Phillips,  Methods 
of  Keeping  the  Public  Money  0/  the  U.  S.  (pp.  160),  in  Pud.  Mich.  Pol. 
Sci.  Assn.,  IV,  No.  3  (Dec,  1900) ;  Letter  from  the  Secretary  of  the  Treas- 
ury, Jan.  10,  1900,  56th  Cong.,  1st  Sess.,  H.  R.,  Doc.  264  (pages  34S)  ; 
J.  Sherman,  Recollections,  II,  798;  H.  C.  Adams,  Finance,  214-218;  W. 
M.  Daniels,  Public  Finance,  322-324;  G.  E.  Roberts,  Forum,  XXIX 
(1900),  1-14;  C.  A.  Conant,  The  Treasury  and  the  Money  Market,  in 
Review  of  Reviews,  XXI  (1900),  202-205;  E.  B.  Patton,  Secretary  Shaw 
and  Precedents  as  to  Control  over  the  Money  Market,  in  Journal  of  Political 
Economy,  XV  (1907),  65-87. 

Accounting  :  Finance  Report,  1894,  pp.  lxvi,  737,  836-837  (comp- 
troller) ;  1895,  p.  587  (audit)  ;  1896,  pp.  676-678  (comptroller) ;  R.  B. 
Bowler,  Decisions  of  the  First  Comptroller  of  the  Treasury,  1893-1894; 
Decisions  of  the  Comptroller  of  the  Treasury,  I— VIII,  1896— 1902;  Report 
of  a  Committee  of  the  Senate  on  the  Books  and  Methods  of  Accounting  in 
the  Treasury  Department  (Washington,  1880) ;  see  also  Report  cf  Senate 
Committee,  1888,  under  "Treasury  Department;"  Report  of  Dockery 
Commission  (Washington,  1893);  Bolles,  II,  567-575;  III,  523-535; 
Treasury  Statement,  in  Bankers'  Magazine,  LVIII  (1899),  717-719;  Vale 
Revieiv,  IX  (1900),  3  (debt  statement);  Quarterly  Journal  of  Economics, 
I  (1887),  357  (inaccurate  debt  statement). 

204.    Initiative  in  Tariff  Bills. 

To  understand  clearly  the  historical  narrative  which  is  now 
brought  down  to  the  great  settlement  of  1900  it  is  necessary 
to  know  something  of  the  methods  of  practical  legislation  and 
treasury  management,  such  as  the  course  of  a  revenue  bill, 
the  practice  of  appropriations,  the  collection  of  revenue,  safe- 
guards for  the  public  moneys,  and  treasury  accounting. 

The  Constitution  clearly  provides  that  "  all  bills  for  raising 
revenue  shall  originate  in  the  House  of  Representatives,  but 
the  Senate  may  propose  or  concur  with  amendments  as  on 
other  bills."  In  spite  of  this  limitation,  the  Senate  exercises  a 
powerful  influence  over  revenue  legislation,  and  sometimes 
has  taken  the  initiative  in  shaping  the  details  of  a  tariff  meas- 
ure. The  tariff  bill  of  1820  passed  the  House,  and  failed  by 
but  one  vote  in  the  Senate ;  and  the  House  woollens  bill  of 
1827   was  defeated  in  the  Senate  by  the  casting  vote  of  the 


§  204]  Initiative  in  Tariff  Bills.  479 

vice-president.  In  1828  the  Senate  changed  the  House  bill 
in  a  most  important  particular,  by  making  the  duties  on 
woollens  ad  valorem  instead  of  specific.  In  1833  the  agita- 
tion in  South  Carolina  led  Senator  Clay  to  introduce  into  the 
Senate  a  still  more  radical  method  of  procedure  in  the  bill 
known  later  as  the  Compromise  Tariff  measure.  When  objec- 
tion was  made  that  the  Senate  had  no  constitutional  power  to 
take  the  initiative,  it  was  explained  that  the  bill  did  not  pro- 
pose to  raise  duties  but  to  reduce  them,  and  since  the  measure 
was  intended  for  protection  and  not  for  revenue,  it  came  out 
of  the  category  of  revenue  measures.  A  discussion  was  con- 
sequently permitted  in  the  Senate,  but  after  a  full  debate  the 
same  bill  was  introduced  into  the  House,  there  passed,  sent  to 
the  Senate,  and  finally  became  a  law. 

A  similar  attempt  to  assert  the  independence  of  the  Senate 
was  made  in  1843,  when  a  bill  was  introduced  by  Senator 
McDuffie  of  South  Carolina,  to  revive  the  tariff  act  of  1833, 
in  place  of  the  existing  tariff  of  1842.  After  a  prolonged 
debate  running  over  weeks,  the  Senate  agreed  almost  unani- 
mously that  such  a  measure  could  not  originate  in  that  body. 
Although  this  distinct  claim  has  not  been  revived  over  a 
tariff  bill,  the  Senate  has  interpreted  its  powers  to  amend  in  a 
most  generous  spirit.  In  1867,  for  example,  it  substituted  as 
an  amendment  to  the  House  bill  the  tariff  measure  which  had 
been  prepared  by  David  A.  Wells,  the  special  commissioner 
of  revenue,  but  the  bill  in  this  form  failed  to  find  approval 
in  the  House.  Again  in  1871  the  Senate  took  great  liberties 
with  a  House  measure  ;  this  was  less  than  four  lines  in  length, 
and  was  confined  simply  to  the  repealing  of  the  tariff  on  tea 
and  coffee.  The  Senate  substituted  as  an  amendment,  a  bill 
of  twenty  printed  pages,  containing  a  general  revision,  reduc- 
tion, and  repeal,  not  only  of  customs  duties,  but  also  of 
internal  revenue  taxes.  As  might  be  presumed,  a  protest  was 
raised  in  the  House,  and  on  this  point  Garfield  a  year  later 
in  the  House  of  Representatives  spoke  as  follows  : x  — 
1   Works,  i,  699. 


480       Legislation  and  Administration.     [§  204 

"  It  is  clear  to  my  mind  that  the  Senate's  power  to  amend 
is  limited  to  the  subject-matter  of  the  bill.  That  limit  is 
natural,  is  definite,  and  can  be  clearly  shown.  If  there  had 
been  no  precedent  in  the  case,  I  should  say  that  a  House  bill 
relating  solely  to  revenue  on  salt  could  not  be  amended  by 
adding  to  it  clauses  raising  revenue  on  textile  fabrics,  but  that 
all  the  amendments  of  the  Senate  should  relate  to  the  duty  on 
salt.  To  admit  that  the  Senate  can  take  a  House  bill  consist- 
ing of  two  lines,  relating  specifically  and  solely  to  a  single 
article,  and  can  draft  upon  that  bill  in  the  name  of  an  amend- 
ment a  whole  system  of  tariff  and  internal  taxation,  is  to  say 
that  they  may  exploit  all  the  meaning  out  of  the  clause  of  the 
Constitution  which  we  are  considering,  and  may  rob  the 
House  of  the  last  vestige  of  its  rights  under  that  clause." 

Notwithstanding  these  protests  the  Senate  succeeded  in  en- 
larging the  scope  of  the  tax  bill  framed  in  1872.  In  1883 
the  Senate  followed  a  similar  procedure,  and  added  to  an 
internal  revenue  bill  which  had  passed  the  House,  the  tariff 
recommendations  submitted  by  the  "  Tariff  Commission," 
propositions  which  were  entirely  alien  to  the  original  import 
of  the  House  bill.  Once  more,  in  1888,  the  Senate  which 
was  at  that  time  Republican,  deliberately  and  independently 
framed  a  tariff  measure  to  offset  the  Democratic  Mills  bill  pre- 
pared in  the  House ;  and  the  Senate  bill  served  as  the  basis 
of  the  tariff  act  of  1890.  The  Senate  in  1894  also  recast  the 
Wilson  bill  so  radically  that  its  revenue  reform  principles  were 
hardly  recognizable ;  nevertheless,  through  political  stress,  the 
House  was  forced  to  accept  most  of  the  amendments  of  the 
upper  chamber.  In  1897  the  Senate  finance  committee  met, 
even  before  Congress  assembled,  and  drew  up  a  tariff  bill,  the 
principles  of  which  were  expressed  in  872  amendments  to 
the  House  bill,  though  not  all  of  these  were  adopted  after 
conference. 

These  illustrations  are  sufficient  to  show  that  practice  has 
worn  away  any  constitutional  limitations  which  may  have 
originally  been  intended  in  the   disposal  of   tariff  bills ;    the 


§  204]  Initiative  in  Tariff  Bills.  48 1 

Senate  has  virtually  assumed  a  leadership  in  shaping  the 
revenue  legislation  of  Congress.  The  Senate  committee  of 
finance  by  its  hearings  and  deliberations  has  acquired  as 
important  a  position  in  tariff  legislation  as  the  House  com- 
mittee on  ways  and  means. 

On  at  least  one  occasion  the  executive  branch  has  prepared 
tariffs ;  this  was  the  Walker  bill  of  1 846,  substantially  drawn 
up  by  the  secretary  of  the  treasury ;  Secretary  Dallas  also  had 
a  large  part  in  the  preparation  of  the  tariff  of  1816.  The 
presidential  power  of  veto,  however,  has  rarely  been  exercised 
in  connection  with  a  tariff  bill.  The  notable  exceptions  are 
the  two  vetoes  of  President  Tyler  in  1842  ;  his  objections, 
however,  applied  not  to  the  revenue  clauses  of  the  bill,  but  to 
the  provision  for  the  distribution  of  the  proceeds  from  sales 
of  public  lands.  In  1869  President  Johnson  vetoed  a  minor 
tariff  bill,  providing  for  an  increase  of  duties  on  imports  of 
copper.  In  1894  President  Cleveland  showed  disapproval  of 
the  Wilson  tariff  by  refusing  to  sign  the  measure. 

The  preparation  of  a  tariff  bill  is  a  long  and  complicated 
task,  for  not  only  must  considerations  of  revenue,  but  the 
adjustment  of  protection  to  industries,  be  taken  into  account. 
This  often  excites  prolonged  contest,  both  between  the  high 
and  low  tariff  men,  and  between  friends  of  particular  indus- 
tries. The  framing  of  a  revenue  bill  is  undertaken  in  the 
House  by  the  committee  on  ways  and  means;  a  sub-com- 
mittee, composed  entirely  of  members  of  the  controlling 
political  party,  is  appointed  to  draft  the  schedules,  and  its 
work  is  frequently  accompanied  by  extended  hearings,  when 
manufacturers  and  other  business  men  present  the  claims 
of  their  respective  industries  for  legislative  favor.  As  the 
tariff  is  treated  as  a  political  measure,  the  minority  of  the 
committee  is  given  no  share  whatever  in  this  preliminary 
work  and  may  have  no  knowledge  of  the  schedules  to  be 
finally  reported  to  the  House  ;  the  minority  usually  submits 
a  dissenting  report,  necessarily  vague  and  general  in  character, 
which  can  be  little  more  than  a  party  pronunciamento.     After 

31 


482       Legislation  and  Administration.     [§  204 


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£ 

§  205]  Appropriation  Bills.  483 

debate  and  passage  in  the  House,  the  bill  goes  to  the  Senate 
where  it  is  referred  to  the  committee  on  finance.  This  com- 
mittee may  undertake  its  consideration  ab  initio,  or  it  may 
summarily  set  the  bill  aside  for  new  plans  which  have  been 
informally  determined  upon.  In  either  case  the  House  bill 
when  it  re-emerges  from  the  committee  is  hardly  recognizable. 
The  Senate  permits  the  offering  of  amendments,  and  many  of 
them  pass.  If  the  bill  then  goes  through  the  Senate,  the  next 
step  is  the  designation  of  a  joint  committee  of  conference  of 
the  two  Houses.  This  committee  has  of  late  years  been  the 
place  for  the  actual  conflict  of  forces ;  theoretically  it  con- 
siders only  points  of  disagreement ;  in  practice  it  strikes  out 
some  non-contentious  matter  and  inserts  new  quarrels. 
Hence,  the  bill,  when  it  once  more  comes  to  the  House,  is  a 
compromise  measure  and  represents  no  harmonious  principle. 
This  roundabout  method,  with  no  one  guiding  mind  behind  it, 
makes  errors  unavoidable,  and  so  exhausting  is  the  task  of 
enacting  a  tariff  law  that  the  dominant  political  party  is 
naturally  indisposed  to  alter  or  amend  the  measure,  even  for 
the  purpose  of  removing  inconsistencies,  for  fear  that  the 
whole  question  of  tariff  revision  may  be  reopened.  As  an 
example  of  the  vicissitudes  of  tariff  legislation  the  illustration 
of  the  changes  made  in  the  wool  schedules  in  1897  is  given 
on  the  opposite  page. 

205.    Appropriation  Bills. 

In  an  earlier  discussion  in  this  book,  it  was  shown  that  the 
constitutional  restrictions  on  appropriation  of  money  for  public 
needs  are  not  intended  to  cramp  Congress  to  a  narrow  range 
of  action  and  hence  practices  have  grown  up  which  on  the 
whole  are  not  conducive  to  a  well-balanced  system  of  finance. 
The  only  constitutional  limit  on  appropriation  is  that  no  vote 
for  the  support  of  the  army  shall  last  more  than  two  years. 
Appropriations  are  made  under  three  different  forms :  "  per- 
manent specific  appropriations,"  "permanent,"  and  "annual." 
In   theory  the   great    bulk  of   appropriations  are    annual    in 


484       Legislation  and  Administration.     [§  205 

accordance  with  the  principle  of  popular  government  that  the 
people  shall  have  a  firm  grip  on  its  purse.  In  practice,  how- 
ever, large  expenditures  are  made  outside  of  this  annual  pro- 
vision, by  permanent  specific  appropriations,  as  for  river  and 
harbors,  fortifications  and  public  buildings,  which  remain  avail- 
able until  the  money  is  spent.  The  reason  for  this  is  clear  : 
continuing  construction  work  cannot  be  subjected  to  the  for- 
tunes of  legislative  procedure,  but  when  once  made  must  be 
so  pledged  that  they  can  be  drawn  upon  as  the  necessities  of 
engineering  work  demand.  Permanent  appropriations  are 
those  which  do  not  require  the  periodic  sanction  of  Congress ; 
once  voted,  they  are  annually  paid  until  the  law  authorizing 
the  expenditure  is  repealed.  In  this  class  are  included  the 
appropriations  for  the  sinking  fund  of  the  public  debt,  annual 
interest  charges,  the  support  of  the  customs  service,  and  the 
salaries  of  judicial  officers.  For  the  fundamental  operations 
of  government,  permanency  is  needed  for  administrative  sta- 
bility ;  this  principle  applies  particularly  to  the  public  debt : 
public  credit  must  be  relieved  from  the  uncertainties  of  annual 
legislative  debate.  Permanent  appropriations,  however,  breed 
abuses,  because  the  items  of  expenditure  are  not  periodically 
subjected  to  the  scrutiny  of  Congress.  For  lack  of  discussion, 
for  example,  the  administration  of  the  customs  has  at  times 
developed  absurdities,  entailed  unnecessary  expense,  and  given 
poor  service.  Custom  houses  have  been  kept  up  at  ports  no 
longer  of  commercial  importance,  and  the  payment  of  officials  by 
fees  instead  of  by  salaries  has  been  continued  long  after  the  best 
interests  of  the  government  demanded  their  discontinuance. 

It  has  been  held  by  sound  authority  that  the  fixing  of  any 
salary  due  to  the  establishment  by  law  of  a  branch  of  adminis- 
tration may  be  regarded  in  the  light  of  a  permanent  annual 
appropriation  ;  and  that  "  in  time  of  conflict  between  Congress 
and  the  president,  it  is  very  probable  that  the  president  would 
conduct  the  government  and  would  have  salaries  paid  without 
annual  appropriations,  and  be   able   to  do  so  successfully." * 

1  Goodnow,  Comparative  Constitutional  Law,  vol.  ii,  p.  285. 


§  205]  Appropriation  Bills.  485 

It  is  estimated  that  one-half  of  the  current  expenses  of  the 
government,  exclusive  of  pensions  and  salaries,  is  beyond  the 
reach  of  any  particular  Congress.,  except  by  positive  legislative 
action  of  a  repealing  character,  requiring  the  assent  of  the 
president,  unless  overruled  by  a  two-thirds  vote  of  Congress. 
A  committee  of  the  Fifty-Second  Congress  found  that  there 
were  1 85  separate  statutes  taking  money  from  the  treasury  in 
the  form  of  permanent  appropriations. 

Congress  has  frequently  attempted  to  attach  general  legisla- 
tion to  an  appropriation  bill  by  riders  or  ingenious  qualifica- 
tions and  restrictions  which  are  alien  to  its  real  purpose.  A 
familiar  example  is  the  Wilmot  Proviso  of  1846,  which  was  an 
amendment  to  an  appropriation  bill,  prohibiting  slavery  in 
territory  that  might  be  acquired  with  the  money  appropriated. 
An  interesting  controversy  was  that  of  a  rider  to  the  army 
appropriation  bill  in  the  House  of  Representatives  in  1879  j 
the  Democrats  were  in  control  of  the  House  from  1875  unt^ 
1 88 1,  and  in  1877  they  secured  a  majority  in  the  Senate, 
though  the  presidency  was  in  the  hands  of  the.  Republicans. 
In  1878,  they  made  an  urgent  effort  to  change  the  election 
laws :  a  single  bill  for  that  purpose,  if  passed,  would  have 
been  vetoed  by  the  president,  but  the  same  end  was  sought 
indirectly  by  adding  sections  to  the  army  appropriation  bill 
and  by  affixing  amendments  to  the  legislative,  executive,  and 
judicial  appropriation  bill.  President  Hayes  set  himself  to 
defeat  the  scheme,  vetoed  the  two  appropriation  bills,  and 
summoned  Congress  to  meet  in  special  session  in  May,  1879. 
The  army  appropriation  bill  was  then  again  reported  with  the 
so-called  political  sections.  The  Republican  debaters  could 
not  deny  that  riders  had  been  previously  attached  to  bills; 
they  urged,  however,  that  provisions  so  extreme  as  those 
under  discussion  were  a  departure  from  the  practice  of  Con- 
gress, and  that  the  contest  was  simply  an  attempt  to  force  the 
president  and  the  minority  out  of  their  constitutional  right  of 
disagreement,  under  penalty  of  stopping  supplies.  They  also 
made    a  distinction   between  an  ordinary  rider,   when    both 


486       Legislation  and  Administration.     [§  205 

branches  of  Congress  and  the  presidency  were  of  the  same 
political  party,  and  riders  put  on  by  a  hostile  majority.  As 
Mr.  Hawley  of  Connecticut  said  :  "  It  was  as  if  there  were  a 
special  train  taking  a  party  to  Baltimore  by  the  last  train  of 
the  week,  and  some  friends  wished  to  crowd  in  with  their 
baggage,  which  ought  not  to  be  taken  on  passenger  trains, 
but  must  go  then  or  never.  Rather  than  have  them  left, 
we  consent.  That  is  quite  different  from  an  attack  of  road 
agents,  who  pull  up  the  rails  saying,  '  the  train  will  not  go 
unless  you  take  us  and  all  our  crew  and  our  burglarious 
implements.' "  The  Democrats  replied  that  while  in  ordinary 
cases  the  putting  of  general  legislation  upon  appropriation 
bills  was  inconvenient  and  injudicious,  it  was  desirable  at  times  : 
"  It  should  not  be  used  as  the  daily  bread  in  legislation,  but 
was  the  medicine  of  the  Constitution  and  proper  to  purge 
away  the  diseases  of  the  body  politic.  When  vicious  laws 
which  impair  the  liberty  of  the  people,  are  firmly  fastened 
upon  the  statute  books  the  House  is  bound  to  say  that  it  will 
appropriate  no  money  to  give  effect  to  such  laws  until  and 
except  they  are  repealed."  The  Democrats  were  obliged  to 
yield,  and  the  integrity  of  appropriation  bills  to  this  extent 
was  protected. 

The  Constitution  says  nothing  about  which  House  shall 
prepare  appropriation  bills ;  as  a  matter  of  fact,  the  initiative 
has  almost  without  interruption  been  taken  by  the  lower 
House,  Until  this  procedure  has  come  to  be  looked  upon  as  a 
part  of  the  unwritten  constitution.  In  January,  1856,  com- 
plaint was  made  that  the  House  habitually  delayed  the 
transmission  of  the  appropriation  bills  to  the  Senate  until 
the  last  days  of  the  session,  when  there  was  no  opportunity 
for  proper  consideration.  A  Senator  complained  that  it  was 
the  practice  to  appropriate  the  peoples'  money  at  the  dead 
hour  of  midnight,  instead  of  in  the  face  of  day,  and  that 
within  a  very  short  time  a  naval  appropriation  bill  for  eight 
millions  of  dollars  had  been  passed  in  the  Senate  without  even 
being  read.     The  charge  was  true  :    the  bill  passed   on   the 


§  205]  Appropriation  Bills.  487 

night  of  the  4th  of  March,1  the  last  day  of  the  session,  and 
under  the  plea  of  pressure  the  bill  was  voted  simply  by  title. 
It  was  consequently  proposed  that  a  division  of  labor  be 
made,  whereby  the  House  should  undertake  the  preparation 
of  a  portion  of  the  appropriation  bills,  leaving  the  Senate  to 
prepare  others ;  and  then  in  the  middle  of  the  session  make 
an  exchange  of  bills.  In  opposition,  it  was  urged  that  the 
practice  of  seventy  years  should  be  respected,  and  that  there 
should  be  no  encroachment  on  the  privileges  of  the  House. 
In  accordance  with  its  resolution,  the  Senate  did  prepare  and 
pass  appropriation  bills  for  the  repairs  of  fortifications  and  for 
invalid  pensions;  but  these  measures  were  treated  by  the 
House  of  Representatives  with  some  contempt,  and  laid  on 
the  table.  The  effort  to  change  the  custom  of  the  govern- 
ment proved  to  be  ineffectual,  and  now  for  many  years  the 
House  has  retained  the  privilege  of  initiating  the  preparation 
of  supply  bills. 

The  most  serious  defect  in  the  plan  of  appropriation  is  the 
scattering  of  responsibility  in  the  preparation  of  the  budget. 
Our  form  of  government  lacks  not  only  controlling  unity  of 
action  in  finance  by  legislative  and  executive  branches,  but  in 
Congress  itself  a  distribution  of  functions  tends  to  prevent  any 
harmonious  system.  Until  1865  the  House  committee  on 
ways  and  means  had  charge  of  all  appropriation  bills  with  a  few 
important  exceptions ;  hence  the  responsibility  of  originating 
plans  of  revenue  and  supply  were  centred  in  the  same  com- 
mittee. In  1865,  the  enormous  amount  of  legislative  work 
occasioned  by  the  Civil  War  caused  the  framing  of  appropria- 
tion bills  to  be  taken  away  from  the  committee  on  ways  and 
means,  and  intrusted  to  a  new  committee  on  appropriations. 
In  1879  and  1885  a  further  cleavage  was  made  by  distributing 
the  fourteen  appropriation  bills  to  eight  different  committees, 
thus  absolutely  preventing  any  system  for  judiciously  appor- 
tioning the  total  outgo.     This  distribution  was  put  in  practice 

1  Congressional  Globe,  Feb.  7,  1856,  34th  Cong.,  1st  Sess.,  Part  I, 
1855-1856,  p.  379.     See  also  Garfield,  Works,  i,  694. 


488       Legislation  and  Administration.     [§  206 

on  the  ground  that  it  would  secure  an  earlier  and  consequently 
more  intelligent  consideration  of  appropriation  measures,  an 
expectation  not  confirmed  by  experience.  The  efforts  of  each 
committee  to  assert  its  individual  importance  at  the  expense 
of  others,  and  to  secure,  irrespective  of  the  best  general  interest 
of  the  country,  as  large  a  share  as  possible  of  the  total 
appropriation,  has  led  to  extravagance  and  even  to  improvi- 
dence. The  principles  of  popular  government  in  the  United 
States  are  against  giving  to  the  executive  much  influence  in 
the  preparation  of  bills  of  supply ;  the  secretary  of  the 
treasury  enjoys  the  formal  privilege  of  submitting  to  the  House 
of  Representatives  a  "  Book  of  Estimates "  which  contains 
the  estimate  of  the  needs  of  the  several  departments,  and 
which  are  not  always  respected  by  either  of  the  two  Houses. 
These  memoranda  find  their  way  to  the  several  committees 
dealing  with  appropriation  bills,  and  form  a  useful  body  of 
information,  but  have  no  binding  force. 

If  there  has  been  a  loss  in  unity  of  preparation,  there  has 
been  a  definiteness  in  the  designation  of  the  objects  of 
supplies.  Appropriations  must  be  specific.  In  1789  there 
was  but  one  appropriation  bill,  thirteen  lines  in  length,  con- 
taining four  items  relating  to  civil  expenses,  military  expenses, 
payment  of  the  public  debt  and  pensions.  Not  only  has  the 
number  of  bills  increased,  until  there  are  now  fourteen,  but 
the  law  requires  that  each  section  of  a  bill  shall  contain  as 
nearly  as  may  be  a  single  proposition  for  enactment.  Definite- 
ness of  control  has  also  been  emphasized  by  the  passage  of 
laws  forbidding  the  transfer  by  the  executive  of  any  appropria- 
tion from  one  object  to  another,  even  if  within  the  same 
branch  of  service. 

206.    Collection  of  Revenue. 

The  collection  of  the  revenue  is  divided  between  two 
branches  of  the  treasury  department,  —  one  for  customs  duties, 
and  the  other  for  internal  revenue  taxes.  The  internal  revenue 
service  is   organized  into  a  separate  bureau   under   a  com- 


§  206]  Collection  of  Revenue.  489 

missioner  of  internal  revenue,  but  the  local  customs  officials 
report  directly  to  the  secretary  of  the  treasury.  The  countcy 
is  divided  into  1 2 1  customs  districts,  in  each  of  which  there 
is  at  least  one  port  of  entry,  where  are  stationed  the  principal 
officer  of  the  district,  the  collector  of  customs,  assisted  by 
subordinate  grades  of  officials,  appraisers,  including  in  a  few 
offices  a  naval  officer  and  surveyors,  and  in  all  offices  in- 
spectors, special  agents,  etc.  If  commercial  needs  demand  it, 
other  ports  of  delivery  are  designated  within  the  district,  and 
at  these  subordinate  officials  are  stationed.  The  largest  port 
of  entry  is  New  York  City,  through  which  flows  two-thirds  of 
the  whole  foreign  commerce  of  the  United  States.  More 
than  5000  persons  are  employed  in  the  collection  of  the 
customs  duties ;  and  the  annual  expense  of  collecting  this 
class  of  revenue  is  about  4  per  cent,  of  the  receipts.  Inas- 
much as  foreign  commerce  has  now  become  insignificant 
in  many  of  the  ports  which  were  important  a  century  ago 
when  the  districting  was  established,  the  expense  of  admin- 
istration might  be  reduced  if  the  customs  districts  were 
organized  according  to  existing  commercial  conditions.  In 
many  of  the  districts  the  cost  of  collection  exceeds  the 
revenue  collected  :  at  such  places  subordinate  officers  might 
well  perform  all  of  the  duties  required ;  but  any  attempt  to . 
deprive  a  State  of  an  established  administrative  district  with 
its  attendant  political  prerogatives,  strikes  against  local  opposi- 
tion which  is  instantly  reflected  in  Congress. 

The  method  of  entering  an  importation  of  foreign  goods, 
including  the  appraisement  and  payment  of  duties,  has  gone 
through  many  variations,  but  is  now  briefly  as  follows :  The 
initial  step  is  the  authentication  of  an  invoice  of  the  goods  by 
the  American  consular  officer  in  the  district  from  which  the 
foreign  goods  are  exported  to  this  country :  the  certificate 
must  state  the  market  or  wholesale  price  in  the  country  of 
export ;  and  the  consular  authentication  is  made  in  triplicate, 
one  for  the  shipper  to  be  used  in  making  entry  at  the  American 
port,  one  is  transmitted  to  the  collector  of  the  port  of  entry, 


49°       Legislation  and  Administration.     [§  206 

and  the  other  is  filed  in  the  consul's  office.  The  invoice  is 
more  than  a  formal  declaration  of  value;  it  must  contain  a 
description  of  the  merchandise,  with  its  cost,  discounts,  charges, 
etc.  Armed  with  this  certificate,  upon  arrival  of  the  goods, 
the  importer  makes  an  entry ;  he  submits  a  description  with 
the  rates  of  duty  which  he  considers  applicable  and  pays 
into  the  custom  house  the  gross  amount  thus  computed  :  an 
immediate  delivery  of  the  goods  is  then  granted,  the  govern- 
ment retaining  one  package  in  every  ten  as  a  sample.  These 
packages  are  sent  to  the  public  stores  or  appraisers'  ware- 
houses for  examination  :  if  the  appraisement  does  not  agree 
with  the  valuation  made,  a  re-settlement  is  ordered,  and  if 
the  proper  valuation  has  not  been  declared  by  the  importer, 
whether  through  ignorance  or  fault,  severe  penalties  may  be 
incurred.  An  excessive  valuation  by  the  shipper  is  never 
lowered,  but  an  undervaluation  is  punished  under  the  present 
law  by  the  imposition  of  an  additional  duty  of  one  per  cent. 
upon  the  appraised  value  for  each  one  per  cent,  that  the 
appraisers'  value  exceeds  that  declared  in  the  entry.  Oppor- 
tunity is  given  to  the  importer  who  does  not  wish  to  use  his 
goods  at  once,  to  deposit  them  under  bond  in  a  warehouse  for 
not  more  than  three  years,  and  to  defer  the  payment  of  the 
duties  until  withdrawal. 

The  principal  difficulty  in  the  administration  of  the  customs 
for  many  years  lay  in  the  persistent  practice  of  undervaluation. 
Some  of  the  efforts  to  check  this  evil  have  already  been  dis- 
cussed, but  the  difficulty  long  remained  and  has  not  yet 
entirely  disappeared.  The  trouble  was  aggravated  by  the 
habit  of  consigning  goods  by  foreign  firms  to  agents  in  America, 
so  that  the  buyer  and  the  seller  were  practically  the  same, 
and  could  agree  on  any  valuation  that  pleased  them.  In  1885 
Secretary  Manning  asserted  that  very  extensive  frauds  were 
due  to  this  agency  system ;  a  foreign  manufacturer  would 
refuse  to  sell  goods  to  other  buyers,  and  then  insist  that  no 
manufactured  articles  similar  to  those  consigned  to  this  country 
were  sold  in  his  market,  and  hence  that  there  could  be  no 


§  206]  Collection  of  Revenue.  491 

market  value  at  that  place  in  the  sense  intended  by  law. 
Repeated  decisions  of  the  courts  adverse  to  such  juggling  with 
the  plain  intent  of  the  law  did  not  put  an  end  to  frauds. 

Ingenious  methods  have  been  devised  to  evade  the  customs  : 
for  example,  when  coverings  came  in  free,  articles  of  small 
value  were  enclosed  in  valuable  coverings ;  sugar  was  artificially 
colored  so  as  to  imitate  standards  which  entered  at  lower  rates 
of  duty.  One  method  was  that  of  fictitious  invoices  :  articles 
were  shipped  by  an  agent  of  the  American  buyer  in  Paris  to 
his  agent  in  New  York  with  a  fictitious  and  fraudulent  invoice  ; 
the  buyer  often  persuading  himself  that  he,  as  a  passive 
recipient,  was  free  from  wrong  or  illegal  behavior.  Even 
among  honest  merchants,  the  administration  of  the  tariff  since 
the  Civil  War  has  been  puzzling,  because  of  the  increasing 
complexity  in  the  schedules  and  consequent  inequalities  in 
classification  and  valuation.  Where  no  open  fraud  was  in- 
tended, there  was  great  opportunity  for  entries  which  would 
defeat  the  express  purpose  of  the  tariff  acts,  especially  in  the 
confusion  created  by  the  varying  classification  between 
"  worsted "  and  "  woollens,"  goods  which,  as  far  as  use  was 
concerned,  were  becoming  more  and  more  identical.  In  1886 
it  was  stated  that  90  per  cent,  of  the  silk  importations  were  as 
a  rule  undervalued  ;  and  so  great  were  the  apparent  difficulties 
of  securing  an  equal  and  just  administration  of  the  law,  that  the 
Democratic  secretary  of  the  treasury,  representing  a  party 
generally  standing  for  ad  valorem  rather  than  specific  duties, 
recommended  specific  duties  on  silks.  Much  litigation  grew 
out  of  the  frequent  changes  in  classification  ;  and  suits  were 
entered  much  more  rapidly  than  the  courts  could  dispose  of 
them. 

A  special  effort  was  made  in  1885  to  remedy  some  of  these 
evils  and  simplify  the  administration,  and  a  bill  originally 
drawn  by  Secretary  Manning  became  the  basis  of  the  so- 
called  McKinley  administrative  act  of  1890.  The  stringency 
of  the  provisions  to  prevent  fraud  was  increased :  additional 
penalties  were  provided  for  undervaluation,  and  the  number 


492       Legislation  and  Administration.     [§  207 

of  general  appraisers  was  increased  in  order  to  correct  ine- 
qualities in  the  appraisement  at  different  ports.  The  appraisers 
were  organized  into  boards  or  courts  for  the  prompt  settlement 
of  questions  of  appeal.  On  a  simple  question  of  value,  a 
board  of  three  general  appraisers  is  a  tribunal  of  last  resort, 
and  this  simple  device  has  greatly  expedited  the  customs 
business.  A  further  appeal  to  the  United  States  courts  lies 
only  in  case  of  alleged  illegal  action  or  irregular  procedure  by 
the  government  officials  in  arriving  at  the  valuation.  On  the 
equally  important  question  of  classification,  another  board  of 
general  appraisers  acts  as  a  judicial  court,  but  in  cases  of  this 
character,  there  is  the  right  of  appeal  to  the  federal  courts 
either  by  the  importer  or  by  the  government. 

The  administration  of  the  internal  revenue  service  does  not 
at  present  involve  many  special  difficulties,  for  questions  of 
valuation  and  classification  are  easy  to  settle.  Great  and 
notorious  frauds  and  scandals  did  spring  up  from  the  opera- 
tions of  the  Whiskey  Ring,  especially  in  the  years  1 872-1 875, 
and  high  government  officials  were  involved,  but  these  were 
instances  of  bribery  and  defiance  of  law,  and  the  corrupt 
practices  are  to  be  interpreted  as  one  of  the  symptoms  of  a 
debased  tone  of  business  and  political  life,  rather  than  as 
a  defect  in  the  revenue  system.  At  present  the  illicit  distilla- 
tion of  whiskey  is  for  the  most  part  confined  to  the  mountain 
districts  of  the  South,  where  moonshiners  operate  on  a  small 
scale.  The  system  has  now  been  so  long  established  that 
attempts  to  evade  the  tax,  by  illicit  distillation  or  fraudulent 
packages,  are  rare.  Under  the  jurisdiction  of  the  commissioner 
of  internal  revenue  are  63  district  collectors,  and  a  force  of 
special  agents  who  watch  distilleries  and  ferret  out  frauds. 

207.   Custody  of  the  Public  Funds. 

The  moneys  of  the  government  are  kept  in  the  treasury  at 
Washington  and  in  nine  sub-treasuries  located  at  Baltimore, 
Boston,  Chicago,   Cincinnati,  New  Orleans,  New  York,  Phil- 


§  207]       Custody  of  the  Public  Funds.         493 

adelphia,  St.  Louis,  and  San  Francisco.  Each  sub-treasury  is 
in  charge  of  an  assistant  treasurer  of  the  United  States.  At 
times  other  offices,  as  mints  or  assay  offices,  have  been  desig- 
nated as  depositories.  In  addition,  a  portion  of  the  public 
funds  may  be  kept  on  deposit  in  national  banks  which  have 
been  designated  as  depositories ;  for  security,  "  the  secretary 
of  the  treasury  shall  require  of  the  associations  thus  designated 
satisfactory  security  by  the  deposit  of  United  States  bonds  and 
otherwise."  In  October,  1902,  Secretary  Shaw  accepted  munic- 
ipal and  State  bonds  as  well  as  federal  securities  in  order  to 
place  with  banks  more  of  the  government  funds  than  they 
would  otherwise  have  been  able  to  take.  In  recent  years  the 
relation  of  the  treasury  to  the  money  market  has  occasioned 
much  perplexity.  Large  sums  are  accumulated  in  the  treasury 
and  thus  withdrawn  from  the  money  market ;  the  periods  of 
large  receipts  and  large  payments  do  not  correspond.  The 
disturbance  of  the  money  market  occurs  even  when  the  an- 
nual budget  is  well  balanced,  but  much  more  so  when  the 
annual  receipts  greatly  exceed  the  expenditures  and  create 
the  serious  and  special  problem  of  dealing  with  a  surplus. 

This  subject  has  been  investigated  at  length  by  Mr.  David 
Kinley  in  his  work  on  "  The  Independent  Treasury  of  the  United 
States  :  "  he  shows  that  the  regular  absorption  and  disburse- 
ment of  money,  particularly  at  the  sub-treasury  in  New  York, 
necessarily  affects  the  volume  of  circulation,  and  that  this  in 
turn  influences  prices;  the  spasmodic  variation  in  prices  is 
then  felt  in  speculation.  More  than  this,  the  irregular  opera- 
tions of  the  treasury  affect  the  amount  of  credit  which  the 
banks  can  offer  to  their  customers.  If  the  bank  reserve  is  cut 
into  by  steady  withdrawals  for  payment  of  customs  duties  or 
other  government  obligations,  and  there  is  no  corresponding 
deposit,  loans  must  be  reduced  and  business  contracted.  The 
independent  treasury  system  has  provided  for  the  safety  of 
public  funds,  and  has  helped  to  furnish  a  safe  currency ;  but 
it  does  not  allow  enough  elasticity  in  the  circulating  medium, 
and  by  its  operations  exposes  business  to  the  alternating  arbi- 


494       Legislation  and  Administration.     [§  207 

trary  contractions  and  expansions  of  the  currency.  The  treas- 
ury really  engages  in  the  banking  business,  though  it  lacks  many 
of  the  powers  of  protecting  its  funds  which  the  banks  possess ; 
it  must  issue  and  redeem  treasury  notes,  and  must  maintain 
a  gold  reserve ;  it  is  also  called  upon  to  relieve  the  money 
market  whenever  stringency  occurs,  either  to  move  the  crops 
in  the  autumn,  or  because  of  unusual  activity  in  business. 

The  surplus  funds  which  accumulate  in  the  treasury  can  be 
turned  back  into  commercial  currents  in  four  ways  :  increased 
expenditures ;  increase  of  deposits  in  banks  as  far  as  these 
funds  are  derived  from  internal  revenue ;  prepayment  of 
interest  on  bonds,  and  the  purchase  of  bonds  in  the  open 
market.  Expenditures  suggested  by  an  overflowing  treasury 
are  not  likely  to  be  wise.  The  deposit  of  public  moneys  in 
banks  invites  criticism  because  of  the  suspicion  that  particular 
banks  are  favored,  and  also  because  such  deposits  may 
become  a  basis  for  speculative  opportunity  to  the  detriment 
of  legitimate  business ;  the  prepayment  of  interest  is  only  a 
temporary  alleviation ;  while  the  purchase  of  bonds  neces- 
sitates the  payments  of  premiums,  generally  highest  when  the 
treasury  most  needs  to  unload.  The  ideal  solution  is  yet  to 
be  found ;  no  system  of  caring  for  government  funds  has  yet 
been  suggested  which  is  free  from  drawbacks.  The  advantages 
of  exclusive  government  custody  are  :  safety,  complete  con- 
trol, divorce  of  the  treasury  from  speculative  movements  in  the 
money  market,  and  absence  of  political  favoritism ;  but  with 
all  these  benefits,  the  system  has  to  face  the  important  injury 
caused  by  the  derangement  of  the  money  market.  If  this 
danger  were  left  out  of  account,  undoubtedly  banks  or  trust 
companies  could  be  found  which  would  perform  the  neces- 
sary treasury  services  with  convenience  and  at  slight  expense. 
A  new  group  of  objections  now  arises ;  private  corporations, 
with  the  tremendous  resources  thus  afforded,  might  enter  the 
field  of  politics,  and  when  large  surpluses  were  in  hand,  be 
tempted  to  lower  the  rate  of  interest,  make  excessive  loans, 
and  help  on  speculation. 


§  208]  The  Mint.  495 


208.  The  Mint. 

From  the  simple  institution  authorized  in  1792,  the  coinage 
office  of  the  government  has  grown  to  a  large  business  enter- 
prise. Coinage  is  now  carried  on  at  three  mints,  —  Philadel- 
phia, San  Francisco,  and  New  Orleans.  The  coinage  executed 
in  the  fiscal  year  1900  exceeded  that  of  any  previous  year, 
amounting  to  over  one  hundred  and  eighty-four  million  pieces, 
valued  at  $141,351,960.  Each  mint  is  in  charge  of  a  superin- 
tendent, and  is  divided  into  the  melter  and  refiner's  depart- 
ment, the  coiner's  department,  and  the  assayer's  department. 
Government  assay  offices  at  New  York,  Carson,  Denver, 
Helena,  Boise,  Charlotte,  St.  Louis,  Deadwood,  and  Seattle, 
serve  a  commercial  purpose  by  determining  the  fineness  of 
gold  and  silver  deposited  by  private  individuals;  they  assay, 
melt,  and  stamp  bar  specie.  At  the  assay  offices,  as  well  as 
at  the  mints,  deposits  of  gold  and  silver  bullion  may  be  made 
by  private  individuals  for  conversion  into  bars  of  standard 
weight,  which  are  more  useful  than  coin  in  making  large  ship- 
ments, particularly  to  foreign  countries.  Each  of  the  mints, 
and  also  the  assay  office  at  New  York,  possesses  a  refinery  for 
the  parting  and  refining  of  bullion.  In  1900  the  earnings  of 
the  refineries  amounted  to  $269, 462  ;  the  total  expenditures 
for  the  entire  mint  service  were  $1,430,007.  Since  1873 
there  has  been  no  seigniorage  on  gold,  but  on  subsidiary  and 
minor  coins  the  profits  have  been  large,  and  the  seigniorage  on 
silver  dollars  since  1878,  including  those  coined  under  the 
Bland- Allison  and  the  Sherman  Acts,  in  1900,  amounted  to 
$102,275,480. 

209.   Supervision  of  Banks. 

The  treasury  department  takes  administrative  responsibility 
over  national  banks  :  first,  in  chartering  them  under  acts  of 
Congress;  second,  by  printing  and  issuing  circulating  notes 
for  the  banks  ;  third,  by  examining  the  condition  of  the  banks 


496       Legislation  and  Administration.     [§  209 

in  order  to  determine  whether  they  comply  with  the  provisions 
of  the  national  banking  act  as  to  reserves,  indebtedness,  loans, 
etc. ;  fourth,  by  assuming  charge  of  any  banking  institution 
which  becomes  insolvent ;  and  fifth,  by  the  collection  of  the 
taxes  imposed  upon  banks.  Most  of  these  duties  are  under- 
taken by  a  special  bureau  in  charge  of  the  comptroller  of  the 
currency ;  a  part  of  the  work,  as  the  custody  of  bonds  depos- 
ited and  the  collection  of  the  tax  on  circulation,  is  performed 
by  the  treasurer  of  the  United  States. 

In  addition  to  the  more  administrative  duties,  the  comptroller 
is  required  by  law  to  make  an  annual  report  to  Congress  in 
regard  to  the  condition  of  banks,  and  also  to  suggest  amend- 
ments to  the  national  banking  laws  by  which  the  system  may 
be  improved,  and  the  security  of  holders  of  notes  and  other 
creditors  be  increased.  As  the  monetary  question  has  been  a 
subject  of  first  importance  since  the  Civil  War  period,  the 
public  interest  in  the  recommendations  and  discussions  of  the 
comptroller  have  been  usually  second  only  to  that  given  to 
the  reports  of  the  secretary  of  the  treasury. 

No  bank  can  begin  business  until  the  articles  of  association 
have  been  submitted  to  the  comptroller  and  approved  by  him  ; 
this  duty  is  largely  formal,  for  the  government  is  simply  inter- 
ested in  the  fulfilment  of  the  conditions  as  to  paying  in  of 
capital  and  deposit  of  bonds,  and  makes  no  judicial  inquiry 
whether  there  be  a  commercial  need  for  a  bank  in  the  place 
named.  Since  the  beginning  of  the  system  in  1863,  5612 
banks  have  been  organized,  of  which  3918  were  in  operation 
in  1900.  For  many  years,  in  particular  after  the  panic  of 
1893,  the  number  of  banks  annually  organized  was  small,  —  in 
some  years  less  than  the  number  surrendering  their  charters. 
In  1900,  however,  owing  to  the  more  liberal  privileges  granted 
by  the  Currency  Law,  the  number  of  charters  greatly  in- 
creased. Banking  corporations  under  State  charters,  trust 
companies,  and  private  firms  still  do  a  large  amount  of  com- 
mercial banking,  it  being  estimated  that  there  are  7000 
private  and  State  banks  of  deposit  and  discount.     The  official 


§  209]  Supervision  of  Banks.  497 

control  by  the  government  after  the  bank  has  once  begun 
operations  is  not  complete.  Each  bank  is  obliged  to  make  to 
the  comptroller  five  reports  annually  on  forms  prescribed  by 
him,  and  must  make  special  reports  whenever  called  upon  j 
it  must  also  promptly  report  the  amount  of  every  dividend 
voted,  and  all  earnings  in  excess  of  such  dividend.  National 
bank  examiners  are  appointed  who  have  power  under  the 
comptroller  to  make,  without  notice,  a  thorough  personal 
examination  into  the  affairs  of  a  bank.  Though  this  super- 
vision has  been  in  the  main  wholesome  and  efficient,  a  large 
number  of  failures  is  evidence  to  the  incompetency  of  bank 
officials,  to  the  neglect  of  bank  directors  to  heed  warnings  of 
examiners,  and  to  the  making  of  loans  over  the  security  of 
which  the  comptroller  has  no  jurisdiction.  From  the  adop- 
tion of  the  system  to  Oct.  31,  1900,  393  national  banks  failed 
and  were  placed  in  the  hands  of  receivers  selected  by  the 
government.  These  failures  have  never  been  disastrous,  since 
the  note-holders  are  always  safe-guarded,  and  depositors  and 
other  creditors  of  failed  banks  have  received,  on  the  average, 
three- fourths  of  their  claims. 

The  banking  questions  with  which  the  government  is  pri- 
marily concerned  are  :  the  protection  of  the  holders  of  bank- 
notes and  the  security  of  its  own  funds  deposited  with  banks. 
The  first  of  these  remains  a  pressing  problem.  Under  the 
present  system,  circulation  is  based  upon  the  deposit  of  federal 
securities,  and  necessarily  the  volume  of  bank  circulation  is 
thereby  limited.  Is  it  possible  to  proceed  longer  under  these 
limitations,  or  shall  circulation  be  freely  granted  based  upon 
the  general  assets  of  a  bank?  What  shall  serve  as  the  assets 
for  the  basis  of  circulation  has  not  yet  been  carefully  desig- 
nated, but  in  order  to  keep  the  circulation  within  bounds, 
propositions  have  been  made  to  tax  the  circulation  in  excess 
of  certain  limits  so  severely  that  it  will  seek  retirement  as 
soon  as  immediate  needs  have  been  satisfied ;  and  secondly, 
to  protect  the  note-holder  by  the  creation  of  a  general  safety 
fund  from  contributions  made  by  all  banks.     The  country  is 

32 


498       Legislation  and  Administration.     [§  210 

slow  to  accept  a  freer  system  which  may  bring  new  evils,  but 
it  appears  highly  probable  that  relief  will  have  to  be  found, 
not  simply  to  satisfy  the  demands  of  the  money  market 
caused  by  the  recent  enormous  expansion  of  business,  but  to 
protect  the  treasury  against  the  selfish  and  clamorous  appeals 
of  private  interests  which  wish  a  freer  deposit  of  government 
funds  for  speculative  use.  From  the  standpoint  of  public 
finance,  the  latter  object  is  as  desirable  as  the  former  may  be 
necessary  for  the  needs  of  commerce. 


210.  Accounting  System. 

The  accounting  system  established  by  Hamilton  served  the 
treasury  efficiently  for  more  than  a  century.  As  the  annual 
payments  of  the  government  grew  into  the  hundreds  of  millions 
of  dollars,  and  bureaus  and  officials  multiplied,  the  settlement 
of  accounts  by  the  old  methods  became  complicated,  and 
exasperating  delays  were  frequent.  In  1894  a  change  was 
introduced,  whereby  the  system  of  audit  was  simplified  and  the 
number  of  comptrollers  reduced  to  one.  This  results  in  the 
saving  of  much  red  tape :  the  settlement  of  accounts  by 
the  auditor  is  conclusive  unless  an  appeal  be  taken  to  the 
comptroller;  or  the  comptroller  on  his  own  motion,  independ- 
ently of  any  request,  may  make  a  revision ;  in  either  case  his 
revision  is  final.  The  autocratic  power  of  the  comptroller 
still  continues  great,  as  was  notably  shown  in  the  refusal  of 
Comptroller  Bowler  in  1895  to  Pav  tne  sugar  bounties,  even 
after  the  warrants  had  been  drawn  by  the  secretary  of  the 
treasury  upon  the  treasurer  of  the  United  States ;  he  yielded 
only  to  a  decision  of  the  Supreme  Court.  The  secretary  of 
the  treasury  reports  to  the  House  of  Representatives  a  state- 
ment of  all  expenditures,  which  are  referred  to  standing  com- 
mittees on  expenditures,  and  by  them  examined.  The  entire 
system  of  accounting  is  one  of  publicity  and  checks.  The 
principal  defect  in  the  publication  of  the  accounts  is  the  lack 
of  clear  classification  of  expenditures.     Some    improvement 


§2n]  Public  Debt  Statement.  499 

has  been  made  in  the  "  Statistical  Abstract "  by  the  publica- 
tion of  detailed  groupings,  but  it  is  difficult  to  harmonize  the 
figures  here' given  with  those  found  in  the  "Finance  Reports." 


211.    Public  Debt  Statement. 

The  condition  of  the  treasury  is  daily  exhibited  in  what  is 
known  as  the  public  debt  statement,  prepared  and  issued 
under  the  direction  of  the  treasurer.  Unfortunately  frequent 
changes  in  the  form  have  served  to  obscure  the  real  amount  of 
public  indebtedness.  A  few  examples  will  illustrate  this  :  For 
1869  the  debt  was  reported  at  four  different  amounts  :  — 

Finance  Report,  1869,  p.  29 52,656,603,000 

Monthly  debt  statement,  July  1,  1869      .     .  2,645,170,000 

Finance  Report,  1870  (June  30, 1869),  p.  25.  2,588,452,000 

Finance  Report,  1870,  by  the  Register,  p.  276  2,489,002,000 

These  several  statements  were  afterwards  explained  by  the 
secretary  of  the  treasury  as  follows  : '  — 

The  first  is  a  statement  of  the  amount  of  the  principal  of 
the  United  States  securities  and  Pacific  Railroad  bonds,  issued 
under  various  acts  of  Congress. 

The  second  is  a  statement  of  the  principal  of  the  outstand- 
ing debt,  including  the  accrued  interest  thereon,  with  the 
Pacific  Railroad  bonds  excluded. 

The  third  shows  the  outstanding  principal  of  this  debt  with 
the  sinking  fund  deducted,  in  accordance  with  the  act  of 
Congress  of  July  14,  1870,  and  exclusive  of  the  Pacific  Rail- 
road bonds. 

The  fourth  is  a  statement  of  the  net  debt  of  the  United 
States  —  principal  and  accrued  interest  —  with  the  cash  in  the 
treasury  deducted. 

In  1885  a  radical  change  was  made  in  the  form  of  the  debt 
statement  by  Secretary  Manning.  The  Pacific  Railroad  bonds, 
heretofore  excluded  on  the  ground  that  the  debt  thus  repre* 

l  Banker?  Magazine,  1872-1873,  p.  467. 


500       Legislation  and  Administration.     [§211 

sented  was  covered  by  a  mortgage,  were  counted  in  as  a 
liability ;  accrued  interest  was  made  a  liability  ;  and  fractional 
silver  which  was  not  legal  tender  was  ruled  out  as  an  "asset.  The 
apparent  total  of  the  interest-bearing  debt  was  thereby  in- 
creased from  $1,196,000,000  to  $1,260,000,000.  While  the 
new  debt  statement  was  clearer  than  the  old  one  in  distinguish- 
ing the  character  of  the  several  liabilities,  the  changes  referred 
to  led  to  absurd  results,  as  when  over  $5,000,000  of  fractional 
silver  was  exchanged  for  gold  certificates,  that  is,  a  non-asset 
was  exchanged  for  an  asset.  The  new  form  did  not  continue 
long;  in  1890  the  national  bank-note  redemption  fund  was 
transferred  from  a  liability  to  an  asset;  and  in  1891  the 
Pacific  Railroad  bonds  and  accrued  interest  were  once  more 
excluded  from  the  liabilities. 

The  use  of  certificate  forms  of  money  has  also  created  con- 
fusion. Gold,  silver,  and  United  States  notes  deposited  in  the 
treasury  against  certificates  have  been  treated  as  assets,  and 
the  certificates  issued  have  been  considered  as  part  of  the 
liabilities  or  indebtedness  of  the  government.  As  the  issue  of 
certificates  increased  with  the  coinage  of  silver,  the  "  cash  in 
the  treasury  "  piled  up  enormously  ;  and  this  of  course  must  be 
subtracted  from  the  gross  debt,  in  order  to  arrive  at  the  true 
indebtedness.  In  the  table  of  "  outstanding  principal  of  the 
public  debt "  published  annually  in  the  "  Finance  Report,"  an 
attempt  has  been  made  to  guard  against  misinterpretation,  as, 
for  example,  "  Finance  Report,"  1900,  page  xcix,  it  is  explained 
that  between  1873  and  1884  certificates  of  deposit  are  included 
in  the  debt,  though  offset  by  notes  held  on  deposit.  Since 
1884  certificates  of  all  kinds  "held  in  the  treasurer's  cash  " 
are  excluded,  but  the  balance  of  certificates,  i.e.,  those  in 
circulation,  are  included.  To  arrive  at  a  true  statement,  the 
volume  of  the  silver,  gold,  and  currency  held  in  trust  against 
the  certificates  in  circulation  must  be  known.  Pacific  Rail- 
road bonds  are  also  included  in  the  table  referred  to.  Accord- 
ing to  this  presentation,  the  debt  in  1900  was  $2,101,000,000. 
On  page  xcviii  the  debt,  however,  is  given  as  $2,137,000,000; 


§2! 2]     Miscellaneous  Treasury  Bureaus.      501 

on  page  ci,  "cash  in  the  treasury  "  is  reported  as  $1,029,000,- 
000,  leaving  a  net  debt,  July  1,  of  $1,108,000,000.  The  kinds 
of  money  which  make  up  the  cash  balance  in  the  treasury, 
and  the  amount  set  aside  for  the  agency  account,  are  stated 
(for  June  30)  in  the  treasurer's  report  of  1900,  on  page  42. 
This  table  further  indicates  the  portion  of  the  "  cash  in  the 
treasury,"  which  is  an  "available  balance."  Upon  the  pas- 
sage of  the  Currency  Act  in  1900,  the  daily  treasury  statement 
was  much  improved,  and  there  is  now  a  clear  presentation  of 
the  trust  funds  of  the  government  and  the  balance  available 
for  current  needs.1 


212     Miscellaneous  Treasury  Bureaus. 

For  many  years  several  bureaus  which  have  little  to  do  with 
finance  were  under  the  jurisdiction  of  the  treasury  department, 
as,  the  marine  hospital  service,  steamboat  inspection,  light- 
houses, life-saving,  immigration,  coast  and  geodetic  survey. 
Political  convenience  is  the  only  explanation  of  these  adminis- 
trative anomalies.  Some  of  these  bureaus  deal  with  commer- 
cial questions,  and  as  no  department  of  commerce  has  yet 
been  organized,  they  are  placed  under  the  department  nearest 
akin.  Upon  the  creation  of  a  new  executive  department  of 
commerce  and  labor  in  1903,  changes  were  made  which  secure 
a  more  harmonious  management  of  public  affairs. 

In  the  course  of  the  narrative,  attention  has  been  directed 
to  a  few  of  the  more  notable  secretaries  of  the  treasury.  In 
the  Appendix,  a  list  of  all  the  secretaries  from  1789  until  the 
present  time  is  given.  While  a  number  of  the  men  who  have 
served  in  this  office  have  not  been  leaders  in  public  affairs,  the 
list,  as  a  whole,  represents  a  roll  of  political  intelligence  and 
integrity.  In  the  past  quarter  of  a  century  there  has  been  a 
greater  disposition  to  select  for  secretary  of  the  treasury  some 

1  Copies  of  "  treasury  statements,"  as  far  as  they  relate  to  the  funds, 
March  13  (old)  and  March  14  (new)  1900,  will  be  found  in  the  Appendix. 


502       Legislation  and  Administration.     [§212 

one  equipped  with  special  training  in  private  finance,  but  it 
cannot  be  said  that  these  have  stood  conspicuously  above 
those  selected  from  political  life.  This  speaks  well  for  the 
general  stability  of  the  fiscal  system  and  is  evidence  that  the 
treasury  administration  is  not  vitally  dependent  upon  the  per- 
sonality of  the  secretary. 

The  subject  of  treasury  administration  cannot  be  left  with- 
out an  expression  of  congratulation  over  the  experience  of  the 
United  States  in  this  field  of  governmental  activity.  There 
are  many  discouraging  chapters  in  the  history  of  local  and 
State  finance ;  democracy  has  too  frequently  turned  aside 
from  the  straight  path  of  honor  and  integrity,  but  the  record 
of  national  finance  may  well  give  satisfaction.  At  times  there 
has  been  a  lack  of  courage  both  on  the  part  of  Congress 
and  of  the  treasury ;  on  occasion  there  has  been  stupid  blun- 
dering, but  treasury  scandals  have  been  few ;  extravagance 
has  rarely  been  degraded  into  corruption.  In  every  emergency 
the  country  has  regained  its  courage  and  acquired  the  intelli- 
gence necessary  to  maintain  its  financial  reputation  at  a  high 
mark.  When  it  is  remembered  that  under  our  system  of  gov- 
ernment, finance  is  not  regarded  as  a  profession,  that  few  of 
the  secretaries  of  the  treasury  have  had  any  special  training  in 
commerce  or  banking,  that  the  departmental  heads  are  com- 
monly chosen  on  account  of  political  service,  and  that  the 
rapid  growth  of  governmental  business  makes  enormous  strains 
upon  the  civil  service,  the  results  are  more  than  satisfactory. 


APPENDIX 


re 
_o 

♦■ ^- t^oo  6  r*.^-i/S«o6  m  o  d  coci  cor^o^o  o»»om 
who  mo  r^oo  t>>co  r*oo  oo  m  o  o  o  cj»co  &  o» «  O  « 

District 
of 

Colum- 
bia 

po  »n  rrao  ■*  w%  o  •-  p*i  w  so  tN.«  t-s.Pi  mvtnNH  tN. 
f»i  «)  m  ri  to  w  (i   -^-  -j-  m  w>  triad  O   mo  O  O*  O  O   t**00 

Post- 
offices, 
court- 
houses, 
custom- 
houses, etc 

m  o>  ♦  ■*  0  wi  *«oo  o  o  ■♦co  po  ~  oo  o  Ooooo  CT-  f.ao 

w    N   w   rnrON   w   «   co  »r»  ♦  ^o   ifttorofor'ip'ifOOO 

3i 

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2 

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Mail 
transpor- 
tation 
Pacific 
Railroad 

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Id? 

m    C                   ifii»W"(>OS"?m'*«-i*i««0 

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Expense 
of  collect- 
ing 
internal 
revenue 

nm-  t«  co  oo  o  oo  oo  o  o  w  oo  oo  oo  i/>o  w  «•>  «•■» 

Deben- 
tures 
and 
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►•••ww  moo  oo  mown  f  mrot  wn  w  w  ♦  m  «n 

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excess  of 
depositson 
unascer- 
tained 
duties 

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n  inwtwrMT^^tTNfnN   w  w   w   »  w  p*j  ♦  r» 

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of 

collect- 
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customs 

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Appendix 


3 

o 

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oo  o>h  ooo  r*>oo  m  h  m  c<  «  no^ 

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manu- 
factures 
of 

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n  o  f*>  fi  fJ;  «'  nwnom^'^io 

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steel, 
manu- 
factures 
of 

Glass, 
manu- 
factures 
of 

oo  woo  n  is  r-*  t»  tnoo  ir»  m  m  m  0 

f»  «Mtt«nt*t^tw«n 

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stone, 

and 

china 

ware. 

E  «   • 

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■♦  <«■  *h*o   r*-,  m  •-*■  -«j-  t  u-,  u-.  ^-  -r  T 

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flax, 

hemp, 
jute 

d^  o*  d*  o  d*  c*  d1-  d*  d  »  ■■  o  **  •* 

1« 

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Wool, 
manu- 
factures 
of 

^  »r  *■  •*  mnwMi  *  ^  0>  »*»  »n 

«  «  m  ct«  r-*  <••  r*  o  n  WNt  -*nC 

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manu- 
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of 

>o  o  *©  r»»  o  o  c  **>■*■  m  o>  ■*  o  m 
oo  d-  fi  o>  &  ■*■  m  »««©  t^co  d*  r^  6 

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of 

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•5  3-S52 


Appendix  507 


III 

Treasury  Statements,  March  13  and  14. 1900. 
I. 

Statement  of  the  Treasury,  March  13,  1900. 

CASH    IN    THE   TREASURY. 

Gold  coin       $288,166,694.89 

Gold  bullion 127,889,340.99)5416,056,035.88 

Outstanding  gold  certificates      5212,947,779.00 
Less     gold     certificates     in 

Treasury 40,408,449.00     172  539,330.00  $243,516,705.88! 

Standard  silver  dollars      .     .  #409,938,837.00 

Outstanding  silver  certificates  #408, 378, 504.00 
Less     silver    certificates    in 

Treasury 6,174,783.00    402,203,721.00  7,735,116.00 

Silver  bullion 111,945.43 

Standard  silver  dollars  of  1890        $9,373, 308.00 

Silver  bullion  of  1890  (cost)         77,402,692.00    $86,776,000.00 

Less    outstanding    Treasury 

Notes 86,776,000.00 

United  States  Notes     .     .  $27,524,293.00 

Outstanding  currency  certifi- 
cates        $16,070,000.00 

Less  currency  certificates  in 
Treasury 915,000.00       15,155,000.00        12,369,293.00 

Treasury  notes  of  1890     .  .  $799,757.00 

National  bank  notes     .     .  .  3,769,548.42 

Fractional  silver  coin   .     .  .  5,308,565.12 

Fractional  currency       .     .  .  80.34 

Minor  coin 437,005.44 

Deposits  in  national  banks  .  111,757,872.13 

Bonds  and  interest  paid    .  .  429,081.05  $122,501,909.50 

Carried  forward .     .     .  $122,501,909.50    $263,733,060.31 

1  Net  gold  and  bullion,  including  $  100,000,000  reserved  for  redemption  of  United  States 
notes,  section  12,  Act  July  12,  1882. 


5o8 


Appendix 


Brought  forward .     .     . 
Less    national    bank    5    per 

cent,  fund 

Outstanding  checks  and  drafts 
Disbursing  officers'  balances 
Post-office    Department    ac- 
count      

Miscellaneous  items     .     .     . 

Available    cash    balance,  in- 
cluding gold  reserve 


$1 22, 501 ,909.50    $263,733,060.3 1 

$9,393,818.32 
6,881,502.39 
57,164,550.91 

6,588,692.03 

2,518,757.05       82,547,320.70        39,954,588.80 


#303,687,649. 1 1 


Statement  of  the  Treasury,  March  14,  1900. 

CASH    IN    THE   TREASURY. 
In  Divisions  of  Issue  and  Redemption. 

Reserve  Fund. 
Gold  coin  and  bullion  in  Division  of  Redemption  $150,000,000 

Trust  Funds. 
Held  for  the  redemption  of  the  notes  and  certificates  for  which  they  are,  re- 
spectively, pledged. 

Division  of  Redemption.  Division  of  Issue. 

Gold  coin #212,799,779       Gold     certificates    out- 
standing      ....    #212,799,779 
Silver  dollars  ....       408,447,504        Silver    certificates    out- 
standing      ....       408,447,504 
Silver  dollars  of  1890     .  9,399,308    )    Treasury      notes      out- 

Silver  bullion  of  1890    .         77,370,692   (       standing        ....        86,770,000 
United  States  notes       .         15,045,000       Currency        certificates 

outstanding       .     .     .         15,045,000 


$723,062,283 


$723,062,283 


General  Fund. 

Gold  coin  and  bullion $53,418,410.23 

Gold  certificates 41,117,182.00 

Standard  silver  dollars 1,510,973.00 

Silver  certificates 6,132,998.00 

Silver  bullion        113,314.93 

United  States  notes '  .     .     .     12,264,358.00 

Carried  forward  .     . $114,557,236.16 


Appendix  509 

Brought  forward $114,557,236.16 

Treasury  notes  of  1890 773,563.00 

National  bank  notes 3,683,654.92 

Fractional  silver  coin 5,284,216.72 

Fractional  currency 80.34 

Minorcoln 434,791-32    $124,733,542.46 

In  National  Bank  Depositaries:  — 
To  credit  of  treasurer  United 

States $105,543,454.69 

To  credit  of  disbursingofficers  6,064,276.78  $111,607,731.47 

Bonds  and  interest  paid    .     .  438,387.19      112,046,118.66 

$236,779,661.12 
Less  national  bank  5  per  cent,  fund      ....     $9,427,702.52 

Outstanding  checks  and  drafts 5,520,038.79 

Disbursing  officers'  balances 57,699,204.79 

Post-office  Department  account         6,631,525.11 

Miscellaneous  items        2,515,200.29        81.793,671.50 

$154,985,989.62 


IV 


Secretaries  of  the  Treasury,  1789  to  1902. 


Name 

Whence  Appointed 

r,  .      c  r-                         Expiration 
Date  of  Commission       of  Service 

Alexander  Hamilton 

New  York 

Sept.  1 1, 

1789 

Jan.  31, 

I79S 

Oliver  Wolcott,  Jr. 

Connecticut 

Feb.  2, 

'79? 

Dec.  31, 

1800 

Samuel  Dexter 

Massachusetts 

Jan.    1, 

1 801 

Mav  6, 

1 801 

Albert  Gallatin 

Pennsylvania 

May  14, 

1 801 

Apr.  20, 

1813 

George  W.  Campbell 

Tennessee 

Feb.  9, 

1814 

Sept.  26, 

,1814 

Alexander  J.  Dallas 

Pennsylvania 

Oct.   6, 

1814 

Oct.  21, 

1816 

William  H.  Crawford  Georgia 

Oct.  22, 

1816 

Mar.  3, 

1825 

Richard  Rush 

Pennsylvania 

Mar.   7, 

1825 

Mar.  3, 

1829 

Samuel  D.  Ingham 

Pennsylvania 

Mar.  6, 

1829 

June  20, 

1831 

Louis  McLane 

Delaware 

Aug.  8, 

1831 

May  29, 

«833 

William  J.  Duane 

Pennsylvania 

May  29, 

"833 

Sept.  23, 

1833 

Roger  B.  Taney 

Maryland 

Sept.  23, 

'833 

June  24, 

1834 

Levi  Woodburv 

New  Hampshire  June  27, 

1834 

Mar.  4, 

1841 

Thomas  Ewing 

Ohio 

Mar.  5, 

1841 

Sept.  11, 

1 841 

Walter  Forward 

Pennsylvania 

Sept.  13, 

1841 

Feb.  28, 

1843 

John  C.  Spencer 

New  York 

Mar.  3, 

1X43 

May  2, 

1844 

5io 


Appendix 


Name 

Whence  Appointed 

Date  of  Commissioi 

Expiration 
of  Service 

George  M.  Bibb 

Kentucky 

June 

i5, 

1844 

Mar.  7, 

1845 

Robert  J.  Walker 

Mississippi 

Mar. 

6, 

1845 

Mar.  5, 

1849 

William  M.  Meredith  Pennsylvania 

Mar. 

8, 

1849  July  22, 

1850 

Thomas  Corwin 

Ohio 

July 

23, 

1850 

Mar.  7, 

1853 

James  Guthrie 

Kentucky 

Mar. 

7, 

1853 

Mar.  6, 

1857 

Howell  Cobb 

Georgia 

Mar. 

6, 

1857 

Dec.  8, 

i860 

Philip  F.  Thomas 

Maryland 

Dec. 

12, 

i860 

Jan.  14, 

1861 

John  A.  Dix 

New  York 

Jan. 

1  I. 

1861 

Mar.  6, 

1 861 

Salmon  P.  Chase 

Ohio 

Mar. 

7- 

1 861 

June  30, 

1864 

Wm.  P.  Fessenden 

Maine 

July 

I, 

1864 

Mar.  3, 

1865 

Hugh  McCulloch 

Indiana 

Mar. 

7, 

1865 

Mar.  4, 

1869 

George  S.  Boutwell 

Massachusetts 

Mar. 

Hi 

1869 

Mar.  16, 

1873 

Wm.  A.  Richardson 

Massachusetts 

Mar. 

17, 

•873 

June  2, 

1874 

Benj.  H.  Bristow 

Kentucky 

June 

2 

1874  June  20, 

1876 

Lot  M.  Morrill 

Maine 

June 

21, 

1876 

Mar.  9, 

1877 

John  Sherman 

Ohio 

Mar. 

9, 

1877 

Mar.  3, 

1881 

William  Windom 

Minnesota 

Mar. 

5, 

1881 

Nov.  13. 

,  1881 

Charles  J.  Folger 

New  York 

Nov. 

1 4, 

1881 

Sept.  4, 

1884 

Walter  Q.  Gresham 

Indiana 

Sept. 

24, 

1884 

Oct.  19, 

1884 

Hugh  McCulloch 

Indiana 

Oct. 

3i, 

1884 

Mar.  6, 

1885 

Daniel  Manning 

New  York 

Mar. 

7, 

1885 

Mar.  31, 

1887 

Charles  S.  Fairchild 

New  York 

April 

i, 

1887 

Mar.  4, 

1889 

William  Windom 

Minnesota 

Mar. 

6, 

1889 

Jan.  29, 

1891 

Charles  Foster 

Ohio 

Feb. 

25, 

1891 

Mar.  6, 

1893 

John  G.  Carlisle 

Kentucky 

Mar. 

7, 

'893 

Mar.  5, 

1897 

Lyman  J.  Gage 

Illinois 

Mar. 

6, 

1897 

Jan.  31, 

1902 

Leslie  M.  Shaw 

Iowa 

Feb. 

i, 

1902 

Mar.  4, 

1907 

George  B.  Cortelyou 

New  York 

Mar. 

4, 

[907 

Mdr  *. 

tft9 

FrAh/flitr/^liVu/h 

Af«K 

4. 

/##£ 

INDEX 


INDEX 


"  ABOMINATIONS,"  tariff  of,  180. 
Accounting,  officers,  87,  498-501  ; 
reforms  in,  by  Guthrie,  269. 

Adams,  J.,  secures  loans  in  Holland, 
48  ;  opinion  of  Robert  Morris,  53. 

Adams,  J.  Q.,  position  on  the  tariff, 
1827,  177;  tariff  duties,  1832,  183; 
tariff  bill,  1832,  184;  tariff  and  prices, 
193 ;  removal  of  deposits,  207  ;  in- 
ternal improvements,  1825,  215. 

Administration,  fiscal,  during  Revolu- 
tion, 52 ;  requirements  in  tariff  of 
'7^9>  S3  !  establishment  of,  in  1789, 
85  ;  corruption,  1837,  233  ;  see 
ch.  xxi ;  Frauds  ;  Treasury  Depart- 
ment ;  Customs  Administration. 

Ad  valorem,  duties,  colonial,  17  ;  in 
tariff  of  1789,  81 ;  in  tariff  of  1846, 
251  :  and  customs  frauds,  491. 

Agricultural  discontent  after  the  Civil 
War,  342. 

Agriculture  in  1789,  76  :  and  taxation 
in  1789,  81. 

Aldrich  Report,  prices  and  wages, 
1860-1865,  294. 

Allison,  Senator,  and  silver  legislation, 
406. 

American   policy  of  debt  redemption, 

353- 

"American  System,"  183. 

Appraisement  of  imports,  Act  of  1818, 
189;  boards,  492;  see  Customs  Ad- 
ministration ;  Undervaluation. 

Appropriations,  colonial,  17-18  ;  in 
Constitution,  72  :  bills  in  1789,  115  ; 
method  of  making,  482-488  ;  riders, 
4S5  ;  specific,  4S8  ;  committees,  4S7. 

Arthur,  President,  veto  of  river  and 
harbor  bill,  426. 


Articles    of    Confederation,    financial 

provisions  in,  49. 
Asset  banking,  497. 
Assumption    of    State    indebtedness, 

92-95. 
Attack  upon  the  Bank;  Surplus,  ch.  ix., 

197-222. 
Auction  sales,  tax  on,  1794,  108  ;  duties 

on,  139  ;  system,  evils  of,  190. 
Auditors,  treasury,  duties  of,  87,  498. 

gACON'S    REBELLION,  12. 

Balance  of  trade,  after  Civil  War, 

371 ;    and    resumption,     377 ;    after 

1880,  410  ;  in  1893.  442. 
Baltimore  plan,  460. 
Bancroft,    G.,   on    constitutionality   of 

legal  tender  issues,  69,  367. 
Bank  checks,  tax  on,  419. 
Bank,  Loan,  in  Massachusetts,  24  ;  in 

Pennsylvania,  26. 
Bank  of  Augusta  v.  Earle,  261. 
Bank  of  Commerce  v.  New  York  City, 

35°- 

Bank  of  Commonwealth*  of  Ky.  v. 
Wister,   160. 

Bank  of  New  York,  1784,  98. 

Bank  9f  North  America,  54-56. 

Bank  of  Pennsylvania,  55. 

Bank  of  U.  S.  v.  Planters  Bank  of 
Ga.,  160. 

Bank,  Silver,  26. 

Bank  v.  Supervisors,  362. 

Banking  and  Taxation,  ch.  xvi.,  383- 
401. 

Banks,  local,  in  1 790-181 I,  127  ;  in- 
crease, 1S11-1816, 144  ;  in  1815-1830 
(table),  153-155;  Suffolk  system, 
155;  safety  fund  system,  155  ;  notes 


33 


5H 


Index 


issued  by,  160 ;  in  1819,  166;  in 
1829-1845  (table),  225 ;  notes  re- 
ceivable by  government,  228  ;  ex- 
pansion of  circulation,  1834-1836, 
232  ;  contraction  of  circulation  after 
1837,  233 ;  opposed  to  independent 
treasury  system,  253  ;  in  1837-1861 
(table).  260;  and  speculation,  262; 
and  panic  of  1857,  264  ;  loan  of  July, 
1861,  278-281  ;  suspension  of  specie 
payments  in  1 861,  281 ;  opposition  to 
increase  of,  in  1862,  285  ;  opposition 
to,  during  Civil  War,  318  ;  arguments 
against,  in  1862,  321-324  ;  fluctua- 
tions in  circulation  of,  324  ;  taxes  on 
issues  of,  in  1865,  328 ;  in  1902, 
496. 

Banks,  national,  proposed  by  Chase, 
280 ;  arguments  in  favor  of,  in  1863, 
320-326 ;  Act  of  1863,  310,  326-328  ; 
and  legal  tender  notes  after  the  Civil 
War,  339  ;  taxation  of,  350  ;  in  1865— 
1879  (table),  388 ;  and  resumption, 
376 ;  in  1864-1879  (table),  384 ;  as 
depositories,  1864-1S79  (table),  387  ; 
opposition  to,  389-391  ;  profits  of, 
390  ;  410,  418  ;  refusal  to  take  silver, 
408 ;  deposit  of  government  funds 
in,  417;  failures  in  1893,  446;  and 
silver  question,  452  ;  in  Currency  Act 
of  1901,  471;  as  depositories,  493; 
reports  of,  497  ;  government  super- 
vision of,  495-498  ;  organization  of, 
496  ;  failures  of,  497. 

Banks,  national,  circulation  of,  after 
the  Civil  War,  383-387  ;  and  resump- 
tion, 374  ;  and  silver  issues,  408 ; 
reduction,  1880-1890,411-413  ;  table, 
412  ;  tax  on,  420  ;  in  1901,  472. 

Banks,  "  Pet,"  209-210. 

Baring  Brothers,  failure  of,  442. 

Barter,  colonial,  19. 

Bastable,  Professor,  definition  of 
finance,  3. 

Beaumarchais,  aid  in  securing  loan,  47. 

Benton,  Senator,  on  tariff  of  1828,  180  ; 
against  re-charter  of  bank  in  1831, 
201  ;  removal  of  deposits,  207  ;  on 
use  of  specie,  210;  internal  improve- 
ments, 212;  distribution  of  surplus, 
221;    treasury    note    issues,      234; 


independent  treasury  system,  240 ; 
bank  bill  of  1S41,  242. 

Biddle,  N.,  President  of  U.  S.  Bank, 
156  ;  correspondence  with  Secretary 
Ingham,  204;  denounced  by  Jackson, 
1832,  205 ;  memorial  of,  in  1832, 
208. 

Bills  of  credit,  revolutionary,  35  ;  de- 
nominations of,  37 ;  attempts  to 
redeem,  37-40 ;  depreciation  of, 
during  Revolution,  39 ;  redeemed 
under  Funding  Act  of  1790,  41,  92  ; 
opposition  to  issues,  43  ;  State  issues, 
43 ;  in  Constitution,  67 ;  States  for- 
bidden to  emit,  69  ;  see  Treasury 
Notes  ;  Legal  Tender   Issues. 

Bimetallism,  argument  drawn  from 
Constitution,  70-71  ;  in  Mint  Act  of 
1792,  103  ;  1873-1885,  see  ch.  xvii. ; 
also  Free  Coinage;  Ratio. 

Black  Friday,  370. 

Blaine,  J.  G.,  on  tariff  of  1846,  264  ; 
panic  of  1857,  264  ;  reciprocity,  439. 

Bland-Allison  Act,  407,  438. 

Bland,  R.  P.,  on  silver  coinage,  406. 

Bonds,  influence  of  depreciation  on  sales 
of,  310;  purchase  of,  by  national 
banks,  325  ;  payable  in  currency, 
question  of,  344-349  ;  sold  abroad, 
352>  354-35°;  taxation  of,  35°-352' 
354  ;  methods  of  selling,  for  resump- 
tion, 374  ;  Manning  on  purchase  of, 
416 ;  difficulties  in  redemption  of, 
1880-1890  (table),  430;  sale  of,  in 
1893,  447;  legality  of  issue,  in  1894, 
450;  syndicate,  453;  sale  of,  in  Cur- 
rency Act,  470  ;  see  Loans. 

Bondholders,  denounced,  347 ;  by 
Greenback  party,  381  ;  desirability  of 
taxation  of,  351. 

Book  of  Estimates,  488. 

Boston,  use  made  of  surplus  in,  222. 

Bounty  on  sugar,  439-440. 

Bourne,  E.  G.,  on  distribution  of  sur- 
plus, 220. 

Boutwell,  G.  S.,  Secretary,  352 ;  sink- 
ing fund  policy,  356;  issue  of  legal 
tender  notes,   360  ;    sales  of    gold, 

369- 
Bowen,    Professor,    on    bank    depos- 
itories, 391. 


Index 


5*5 


Branch  drafts,  156,  202. 

Brcck,  S.,  on  depreciation  of  Continen- 
tal bills,  41. 

Briscoe  v.  Commonwealth  of  Ky.,  261. 

Bristow,  Secretary,  appointed,  372; 
sinking  fund  policy,  357;  gold  re- 
serve, 374;  whiskey  frauds,  396. 

Bronson,  H.,  value  of  Continental  bills 
of  credit,  40. 

Bronson  v.  Kodes,  362. 

Bryan,  W.  J.,  presidential  campaign, 
461. 

"  Bubble  "  Act,  1741,  26. 

Buchanan,  J.,  on  tariff  of  1828,  180. 

Budget,  responsibility  of,  upon  Con- 
gress, 87  ;  lack  of  responsibility,  487. 

Bullock,  C.  J.,  value  of  Continental 
bills,  40 ;  requisitions  during  Revo- 
lution, 45  ;  finances,  1784-1789,  57. 

Butler,  B.  F.,  on  payment  of  bonds, 
1868,  348. 

("""AIRNES,  Professor,  on  balance  of 
"^   trade  after  Civil  War,  371. 

Calhoun,  J.  G.,  on  a  national  bank, 
1814,  147  ;  attack  upon  State  banks 
in  1816,  149;  tariff  of  1816,  164, 
194;  tariff  bill  of  1827,  177;  tariff  of 
1828,  178,  182;  tariff  of  1833,  188; 
resignation  of  Vice-Presidency,  1 86  ; 
distribution  of  surplus,  220;  inde- 
pendent treasury,  1837,  236. 

Campbell,  G.  W.,  Secretary,  131. 

Canada,  colonial  export  duties,  16. 

Canals  in  1789,  79. 

Capital,  lack  of  in  181 2,  133. 

Capitation  taxes  in  Constitution,  64. 

Capital  of  U.  S.  and  assumption  of 
State  debts,  93. 

Cariisle.  Secretary,  on  silver,  444  ;  sale 
of  bonds,  448  ;  withdrawal  of  green- 
backs, 459. 

Carriage  tax,  constitutionality  of,  1796, 
106-107 ;  in  1814,  139. 

Carey,  H.  C,  on  tariff  and  prices,  194  ; 
"young  industries"  argument,  194. 

Carey,  Matthew,  on  value  of  a  home 
market,  102;  tariff  and  prices,  193. 

Castle  duties,  colonial,  15. 

Certificate  forms  of  money  after  Civil 
War,  431  ;  in  debt  statement,  500. 


Certificates  of  deposit,  300.. 
Certificates    of    indebtedness   in    Civil 

War.  3°9»  332- 

Certificates,  silver,  1878-1890,  407;  in 
Currency  Act,  1900,  471, 

Chase,  S.  P.,  appointed  secretary,  1861, 
274  ;  on  public  lands,  273 ;  Independ- 
ent Treasury  Act,  1861,  279-282  ;  use 
of  demand  notes,  279 ;  report  of  Dec, 
1861,  280;  suspension  of  specie  pay- 
ments, 281  ;  Legal  Tender  Act,  286, 
288-290 ;  opposition  to  converti- 
bility of  legal  tender  notes,  291  ;  at- 
tempts to  check  premium  on  gold, 
296 ;  recommendation  of  taxes  in 
1861,  300;  recommendations  in  re- 
port of  1862,  302;  interpretation  of 
market  value  of  bonds,  307  ;  tempo- 
rary loans,  309  ;  success  of  bond  sales, 
1863,  310;  short-term  notes,  312; 
report  of  1863,  312-313;  compound 
interest  notes,  314  ;  loan  policy,  317- 
320  ;  bank  circulation,  320  ;  resigna- 
tion, 314  ;  resumption,  335  ;  payment 
of  bonds,  346;  redemption  of  debt, 
353  ;  constitutionality  of  legal  tender 
notes,  363. 

Cheves,  L.,on  excise  duties,  1812,  139  ; 
president  of  Second  U.  S.  Bank 
152. 

Choate,  R.,  on  Navigation  Acts,  31. 

Circulation  of  bank-notes,  see  Banks, 
local;  Banks,  national;  Banks,  na- 
tional, circulation  of. 

Civil  War;  Legal  Tender,  ch.  xii., 
271-297;  Taxation  and  Loans,  ch. 
xiii.,  298-330  ;  cost  of,  329. 

Classification  of  imports,  difficulties  in, 
491-492. 

Clay,  H.,  in  favor  of  U.  S.  Bank,  1816, 
149;  position  on  tariff,  1827,  177; 
tariff  resolution,  1830,  182;  cham- 
pion of  American  system,  183;  tariff 
resolution  in  1832,  183;  Compro- 
mise Tariff  of  1833,  186;  arguments 
for  industrial  independence,  192 ; 
commercial  freedom,  193;  tariff  and 
prices,  193;  "young  industries" 
argument,  194  ;  re-chartering  U.  S. 
Bank,  208-209;  internal  improve- 
ments, 214  ;  distribution  of  land  pro- 


5i6 


Index 


ceeds,  218-221 ;  independent  treas- 
ury* 237  >  contest  with  Tyler  over 
bank,  240-241 ;  initiation  of  tariff 
legislation,  479. 

Cleveland,  President,  on  finances  in 
18S6,  416;  deposit  of  government 
funds,  417;  tariff  message,  1887,  423  ; 
veto  of  pension  bill,  427  ;  veto  of,  re- 
funding direct  tax,  427  ;  silver  pur- 
chases, 444;  Venezuela  message,  453; 
need  of  issue  of  bonds,  454;  tariff  of 
1894,  456,  481  ;  withdrawal  of  green- 
backs, 459. 

Cobb,  Secretary,  tariff  recommenda- 
tions, 265. 

Coffee,  Secretary  Walker  on  taxation 
of,  250;  tax  removed  in  1872,  398. 

Coin,  redemption  of  bonds  in,  354,356. 

Coinage,  colonial,  18-21  ;  meaning  of, 
70;  in  Constitution,  70-71;  confu- 
sion in  1790,  102;  in  1792-1853, 
210-212;  Act  of  1834,  211;  Act  of 
1853,212;  see  Free  Coinage;  Mint; 
Silver;  Seigniorage. 

"Coin's  Financial  School,"  462. 

Colonial  Finance,  ch.  i.,  1-32. 

Commerce  and  navigation  report,  1821, 
165. 

Commerce,  treaties  of,  in  Articles  of 
Confederation,  50. 

Commercial  freedom,  desire  for,  during 
Revolution,  51. 

Commodities  as  money,  colonial,  19. 

Compound  duties,  1828,  179. 

Compound  interest  notes  issued  by 
Chase,  314;  by  Fessenden,  316;  in 
1865,  332;  retirement  of,  334,  343. 

Compromise  Tariff,  185-189. 

Comptroller  of  the  Currency,  496. 

Comptrollers,  treasury,  duties  of,  87, 
498. 

Confederation,  see  Articles  of  Confeder- 
ation; also  ch.  ii. 

Connecticut,  colonial  taxes  in,  15  ;  ex- 
port duties,  15  ;  tariff,  17. 

Constitution,  financial  sections  in  the, 
see  ch.  lii.,  60-74;  opposition  to, 
73:  Eleventh  Amendment,  245. 

Constitutionality  of  U.  S.  bank,  157- 
160;  Jackson's  view,  1829,  200;  of 
State  bank   issues,   160,    261;    tariff 


legislation,  195-196  ;  of  legal  tender 
notes,  362-367 ;  of  income  tax,  456. 

Consular  authentication,  489. 

Continental  bills  of  credit,  36-43. 

Contraction  of  treasury  notes,  approved 
by  House  of  Representatives,  in  1865, 
335;  arguments  against,  338-339; 
abandoned,  1868,  343 ;  in  Resump- 
tion Act,  373. 

Convention  of  1787,  59-60. 

Conversion  of  indebtedness,  1790,  94- 
96;  see  Funding;  Funding  Act. 

Cooke,  J.,  agent  for  sale  of  bonds.  311, 

3'5,  3*9- 
Corwin,  Secretary,  on  protection,  258- 

259. 
Cost  of  collecting   excise  duties,   106, 

120;  in  1814-1817,  140;  of  customs, 

489. 
Cotton  crop  in  i860,  273. 
Cotton  duties,  1816,  162. 
Cotton  plantations,  speculation  in  1837, 

226. 
Cotton,  price  of,  1S33,  227. 
Coxe,  Tench,  on  condition  of   United 

States,  58  ;  manufactures,  77. 
Craig  v.  State  of  Missouri,  160. 
Crawford,   Senator,  on    opposition    to 

First    U.  S.   Bank,   127 ;   secretary, 

1816-1825,   164 ;    financial   situation 

in  1819,  174;  mint  ratio,  1819,  211. 
Credit,  national,  affected  by  State  re- 
pudiation,   244-246 ;   in    186c,    272  ; 

in  1861,  2S3  ;  see  Interest,  Kate  of. 
Credit  system,  in  customs,  187,   191  ; 

abolished  in  1S42,  239;  in  land  sales, 

216,  225. 
"  Cremation    theory  "    of   resumption, 

336. 

"  Crime  "  of  1873,  404. 

Crisis  of  1819,  166,  173;  of  1825,  176; 
see  Panic. 

Crop  failures  of  1835,  230. 

Cumberland  Road,  213,  225. 

Currency,  see  Bills  of  Credit ;  Green- 
back Party ;  Legal  Tender  Issues : 
Circulation,  National,  Bank ;  Treas- 
ury Notes. 

Currency  Act  of  1900,  468. 

Customs  administration,  colonial,  7, 
9;    1780-1833,   189-191  ,    warehouse 


Index 


517 


system,  239,  252;  Act  of  1890,  439; 
present  methods,  489-492  ;  see  Val- 
uation. 

Customs  districts,  489. 

Customs  duties,  see  Tariff. 

Customs  receipts  (tables)  in  1789-1801, 
no;    in    1801-1811,  123;    in    1812- 

1815,  142;  in  1816-1833,  168;  in 
1833-1846,  246;  in  1846-1861,  267; 
in  1861-1865,  299;  in  1866-1879, 
399;  in  1S80-1890,  426;  in  1891- 
1901,  475  ;  decline  in,  1890-1894, 
442;  character  of,  1891-1892,  443- 
444;  amounts  by  items,  1880-1893, 
506. 

T~)ALLAS,  Secretary,  131-132 ;  on 
treasury  notes,  136  ;  in  favor  of 
permanent  internal  duties,  141  ;  in 
favor  of  U.  S.  Bank,  1814,  145  ;  im- 
port duties,  181 6,  161  ;  preparation 
of  tariff  of  1816,  481. 

Davis,  A.  M.,  on  Land  Bank,  26;  de- 
preciation of  paper  money  in  Massa- 
chusetts, 28. 

Debt,  national,  in  17S9,  90;  in  1790, 
94;  difficulty  in  determining  amount 
in  1795,  116;  in  1789-1801  (table), 
113  ;  in  1801-1812  (table),  125  ;  re- 
duction of,  1801-1812,   124-126;   in 

1 8 16,  165  ;  difficulties  in  payment 
after  1822,  170-171;  extinguished  in 
1835,  219;  created  by  Mexican  War, 
255;  in  1861,  276;  character  of, 
1861-1865,  308;  temporary,  in  Civil 
War,  309,  312;  in  1865,  332!  in 
1865-1879  (table),  341 ;  funding  of, 
in  1870,  352-354  ;  changes  in,  1880- 
1890,  431  ;  reduction  of,  1880-1890, 
431 ;  character  of,  1880-1890  (table), 
432;  character  of,  1891-1900  (table), 
473  ;  payment  deferred  in  1900,  473  ; 
see  Bonds ;  Loans. 

Debt,  revolutionary,  in  1784,  56  ;  for- 
eign, in  1789,  57,  89;  funded,  89; 
domestic,  in  17S9,  89. 

Debt  statement,  national,  497. 

Debtor  laws,  colonial,  8. 

Debts,  State,  assumed  in  1790,  92. 

Deficit,  in  1791-1801  (table),  112:  in 
1809.  12^  126;  in  1816-1833  (table), 


170;  in  1834-1846  (table),  247;  in 
1846-1861  (table),  269  ;  in  1862- 
1865  (table),  331 ;  in  1866-1879 
(table),  401  ;  in  1890-1901  (table), 
476. 
Demand  notes  of  1861,  279,  283. 
Democratic  party  on  tariff  in  1844,  249 ; 
payment  of  bonds  in  1868,  348 ; 
resumption,  374 :  Greenbackism, 
378 ;  taxation  of  State  bank  notes, 
388  ;  tariff  of  1883,  422  ;  position  on 
tariff,  416,  424  ;  tariff  of  1894,  455, 
458  ;  silver  coinage,  1896,  461. 

Democracy,  influence  of,  and  banking, 
1830,  199. 

Demonetization,  see  Silver. 

Denominations  of  Continental  bills,  37. 

Deposit  of  government  funds,  in  First 
U.  S.  Bank,  1791-1811,  101  ;  in 
1811,  127;  in  1812-1817,  145  ;  Act  of 
1816,  203 ;  removal  of,  206,  209-210  ; 
in  local  banks  after  1833,  22°  '■>  'n 
1841-1846,  243  ;  in  national  banks, 
325,  417  ;  question  of,  493. 

Deposit  of  surplus,  1836,  220. 

Depreciation,  of  colonial  bills  of  credit, 
23,  28  ;  of  bills  of  credit,  during  the 
Revolution,  39-41  ;  of  legal  tender 
notes  of  Civil  War,  292-294 ;  influ- 
ence on  bond  sales,  310. 

Dexter,  S.,  Secretary,  117. 

Dingley  tariff,  463-465. 

Direct  taxes,  in  the  Constitution,  62  ; 
definition  of,  65,  107  ;  imposition  of, 
in  1798,  109;  in  1814,  139;  in  1814- 
1817  (table),  140;  in  1861,  277; 
veto  of  refunding  of,  427  ;  in  income 
tax  decision,  1894,  457. 

Distribution  of  surplus,  see  Surplus. 

Dividends  from  U.  S.  Bank,  101. 

Dix,  J.  A.,  Secretary,  272. 

Dollar,  in  Mint  Act  of  1791,  103; 
Greenback  definition,  380. 

Dolph,  Senator,  on  appropriations, 
1887,  427. 

Drafts,  branch,  introduced,  156;  de- 
nunciation of,  1832,  202. 

Drawbacks,  1 789,  83. 

Duane,  W.  J.,  Secretary,  199.  2°5 : 
opposition  to  Jackson's  bank  policy, 
205. 


5i8 


Index 


Dunbar,  C.  F.,  on  meaning  of  direct 
taxes,  108;  on  sinking  fund,  115. 

Dutch  bankers'  loans,  1782,  48. 

Dutch  fiscal  methods  in  New  Nether- 
lands, 13. 

Duties,  kinds  of  money  received  for, 
1789-1S36,  227;  collection  of,  in 
1789,  84  ;  set  Customs  ;  Excise;  In- 
ternal Revenue ;  Rates  of  Duties  on 
imports ;  Tariff. 

J?  ASTERN  STATES,  opposed  to 
War  of  1812,  133. 

Eckels,  comptroller,  on  withdrawal  of 
greenbacks,  459. 

Economies  and  War,  ch.  vi.,  1 18-142. 

Embargo  Act,  122-123. 

Endless  chain,  449,  451. 

England,  opposed  to  colonial  paper 
money,  28-30  ;  attempts  to  tax  colo- 
nies, 30-32 ;  customs  laws  during 
Revolution,  51 ;  failure  of  banks  in 
1836,  230 ;  reduction  of  import  duties 
in  1842,  257. 

English  plan  of  resumption,  336. 

Entry  of  goods,  489. 

Erie  canal,  224. 

Establishment  of  a  National  System, 
ch.  iv.,  75-96. 

Ewing,  Secretary,  plan  for  a  bank,  240. 

Exchange,  domestic,  1830,  201. 

Exchange,  foreign,  in  Massachusetts  in 
1740,  28. 

Excise  duties,  colonial,  10  ;  in  Massa- 
chusetts, 12 ;  brought  from  New 
Netherlands,  13  ;  in  Constitution,  66  ; 
early  opposition  to,  73 ;  difficulties 
of  imposition  in  1789,  79;  on  whis- 
key, 1791,  105;  in  1794,  107;  in 
1789-180?,  no;  abolished,  1802, 
120  ;  see  Internal  Revenue. 

Executive  in  financial  system,  72 ; 
Jackson's  view,  206  ;  see  ch.  xxi. 

Expenditures,  colonial,  8-9  ;  by  Conti- 
nental Congress,  34;  in  1783,  56; 
1 789-1801  (table),  in  ;  reduction 
in,  1801,  119;  for  national  defences, 
1807,  123;  in  1801-1811,  124;  in 
1812-1815  (table),  141  ;  in  1820, 
167;  in  1816-1833  (table),  169;  for 
roads  and  canals,  1802-1835  (table), 


216;  increase  of,  in  1837,  233,  247; 
in  1833-1846  (table),  246  ;  during 
Mexican  War,  255:  after  Mexican 
War,  258  ;  in  1846-1861  (table),  267  ; 
in  1862-1865  (table),  329  ;  in  1866- 
1879  (table),  399  ;  miscellaneous, 
1866-1879  (table),  401  ;  in  1880- 
1890,  426;  (table),  428:  in  1891- 
1901,  475  ;  lack  of  classification, 
498. 

Exports,  colonial.  5  ;  value  of,  in  1 790, 
79;  in  1830-1837,226;  in  i860,  273; 
in  185S-1872,  371  ;  after  1S72,  377. 

Export  taxes,  in  colony  of  Virginia,  12  ; 
colonial,  15-16  ;  in  Constitution,  62, 
64. 

Export  theory  of  taxation,  181,  184, 
195. 

J7ACULTY  TAX,  colonial,  10,  n. 
Fairchild,    Secretary,   on    sinking 
fund  purchases,  429. 

Famine  in  Ireland,  influence  of,  257. 

Federal  administration  of  finances,  117. 

Federalist  party,  opposed  to  excise 
duties,  120  ;  opposition  to  abolition 
of  excise  duties  in  1802,  120  ;  repeal 
of  salt  tax,   122. 

Fessenden,  Senator,  Committee  on 
Finance,  275  ;  on  legal  tender  issues, 
290  ;  desire  for  taxation,  300  ;  ap- 
pointed secretary,  314  ;  resignation, 
315  ;  on  national  banking  system, 
328  ;  in  the  Senate,  334. 

Fiat  money,  379. 

Finance,  definition  of,  3. 

Financial  Provisions  of  the  Constitu- 
tion, ch.  iii.,  60-74. 

Fisheries,  colonial,  6. 

Fisk,  J.,  and  gold  speculation,  369. 

Five-twenty  bonds  of  1862,  306;  pay- 
able in  coin,  347  ;  conversion  of,  354. 

Florida,  repudiation,  244. 

Folger,  Secretary,  on  surplus  revenue, 
1882,  415  ;  deposits  in  banks,  416; 
on  tariff  of  1883,  422,  423. 

Foster,  Secretary,  on  gold  reserve,  444. 

Foreign  debt  in  1789,  89;  after   Civil 

War»  354-356,  37'- 
Foreign  holdings  in  First  U.  S.  Bank. 
127. 


Index 


5*9 


Foreign  intercourse,  expenditures, 
1804-1806,  124. 

Foreign  trade  in  1 789,  79. 

Fractional  currency,  310,  332. 

France,  Revolutionary  loan  from,  46, 
48. 

Franco-Prussian  War,  influence  on 
refunding,  356. 

Franklin,  B.,  on  prohibition  of  paper 
money  in  America,  30 ;  secures 
French  subsidies,  47 ;  on  coinage,  70. 

Frauds,  in  internal  revenue,  393,  395, 
492;  in  undervaluation,  491. 

Free  coinage  of  silver,  405,  436,  46c- 
462. 

Free  trade,  ideas  in  1816,  163;  con- 
vention in  1831,  183:  arguments, 
194-196  ;  basis  of  tariff  of  1846,  251 ; 
progress  toward,  1846-1857,  258. 

Funding  Act  of  1790,  provisions  of, 
94-96;  of  April  12,  1866,  340;  of 
1870,  356,  429,  450;  denounced  by 
Greenback  party,  381 :  and  national 
bank-note  circulation,  386. 

Funding  of  Revolutionary  debt,  89. 

Funding  of  the  indebtedness,  ch.  xiv., 

Funds  available  in  treasury,  221. 
Funds,  custody  of  treasury,  492. 

(""J.AGE,  L.  J.,  on  withdrawal  of 
greenbacks,  459. 

Gallatin,  A.,  on  powers  of  Secretary  of 
the  Treasury,  86;  criticism  of  Hamil- 
ton. 1 15-116;  appointed  secretary, 
119;  sinking  fund,  125;  in  favor  of 
U.  S.  Bank,  1809,  126;  financial 
preparation  for  war,  1 29 ;  opposition 
to,  131;  left  treasury  department, 
1813,  131;  treasury  notes,  135;  in- 
ternal improvements,  214  ;  taxation 
of  State  bank  notes,  388. 

Gallatin,  J.,  on  independent  treasury 
legislation,  1861,  279. 

Garfield,  J.  A., on  financial  re-organiza- 
tion after  the  war.  332 ;  bonds  pay- 
able in  gold,  346;  tariff  legislation 
after  Civil  War,  396 ;  initiation  of 
tariff  legislation,  479. 

Germany,  demonetization  of  silver, 
405. 


Gerry,  E.,  on  management  of  finances, 
18;  treasury  system,  1789,85. 

Gold  bill,  1864,  296;  repeal,  297. 

Gold  certificates  in  debt  statement,  500. 

Gold  coinage,  210,  see  Ratio. 

Gold  premium  during  Civil  War,  294, 
295,  297. 

Gold,  production  of,  and  panic  of  1857, 
264 ;  in  i860,  273,  274 ;  amount  of,  in 
1866,  337. 

Gold  reserve,  advised  for  resumption, 
335  ;  decline  after  1890,  440;  protec- 
tion of,  in  1893,  447  i  amount  re- 
quired, 454 ;  in  Currency  Act,  470. 

Gold  sales  in  1864,  368;  after  Civil 
War,  368-370. 

Goodnow,  F.  J.,  on  appropriations, 
484. 

Gorman- Wilson  tariff,  455. 

Gouge,  W.,  on  independent  treasury, 
235 ;  examination  of  independent 
treasury  system,  253. 

Gould,  J.,  and  gold  speculation,  369. 

Granger  legislation,  410. 

Grant.  President,  on  payment  of  bonds, 
1869,  349 ;  veto  of  currency  increase, 
1874,  361,  362  ;  na'.ional  bank  circu- 
lation, 387;  silver  in  1873,  4°5- 

Greeley,  H.,  on  protection,  397. 

Greenback  party,  338,  378-382  ;  num- 
ber of  voters,  381 ;  silver  coinage, 
409;  see  Inflation. 

Greenbacks,  see  Legal  Tenders. 

Greenbacks  and  Resumption,  ch.  xv., 

359-382- 

Groton,  use  made  of  surplus,  222. 

Guthrie,  J.,  Secretary,  on  independent 
treasury  system,  253;  reduction  of 
customs,  258  ;  character  of,  269. 

HAMILTON,  A.,  on  right  to  issue 
bills  of  credit,  69;  manufactures 
in  1789,  77:  powers  of  the  Secretary 
of  the  Treasury,  86  ;  appointed  secre- 
tary, 88  ;  principal  reports,  88 ;  re- 
port on  public  credit,  89;  funding 
of  the  debt,  89 ;  assumption  of  State 
debts,  92  ;  national  banks,  98 ;  coin- 
age, 103 ;  excise  duties,  105 ;  sink- 
ing fund  policy,  114;  administration 
criticised,  115-117;  value  of  a  home 


52° 


Index 


market,  192;  tariff  and  prices,  192; 

tariff    arguments   for   independence, 

191 ;   moneys   receivable   for  duties, 

227. 
Hare,  J.  I.  C,  on  coinage,  71. 
Harrisburg  Convention,  1827,  177,  179. 
Harrison,  President,  238. 
Hart,  A.  B.,  on  Supreme  Court,  1871, 

3f>4- 

Hawley,  Representative,  on  appropria- 
tion riders,  486. 

Hayes,  President,  veto  of  silver  bill, 
407  ;  veto  of  appropriation  bills,  485. 

Hayne,  Governor,  and  nullification, 
186. 

Hemp,  taxation  of,  1789,  81  ;  in  1824, 
175  ;  in  1828,  179. 

Hepburn  v.  Griswold,  362. 

Hildreth,  R.,  value  of  continental  bills 
of  credit,  40. 

Hill,  W.,  classification  of  colonial  tar- 
iffs, 1 5 ;  colonial  evasion  of  taxes, 
17  ;  protection  in  1789,  84-85. 

Holland,  loans  from,  Revolutionary, 
47;  loans  in  1784-1789,  57;  Ameri- 
can credit  in,  during  Civil  War,  355. 

Home  market  and  tariff,  192. 

Home  valuation,  187,  190. 

Horizontal  reduction  of  duties  in  Act 
of  1833,  188. 

Howe,  F.  C,  on  Internal  Revenue  Act 
of  1864,  303. 

Hylton  v.  United  States,  457. 

ILLINOIS,    increase   of   population, 

224. 
Immigration,  1845-1855,  257  ;  in  i860, 

273- 

Import  duties,  colonial,  12;  imposed 
by  England,  30  ;  constitutional  re- 
strictions, 73  ;  payable  in  coin,  1862, 
287  ;  see  Tariff ;  Rates  of  Duties  on 
Imports. 

Imports,  statistics  of,  1789, 82  ;  in  1 814- 
1816,  161  ;  in  1816-1833  (table), 
170;  undervaluation,  176;  in  1830- 
1837,  226;  in  1858-1872,  371. 

Imposts  during  the  Confederacy,  49 ; 
measure  of  1783,  80. 

Impressment  of  supplies  during  Revo- 
lution, 46. 


Income  tax,  colonial,  11 ;  in  1861,  277; 
of  Civil  War  (table),  305  ;  in  1894, 
456  ;  declared  unconstitutional,  457. 

Indents,  45. 

Independence  and  tariff,  191. 

Independent  treasury  recommended  by 
Van  Buren,  235  ;  discussion,  235- 
237  ;  established,  236  ;  repeal,  1841, 
239  ;  re-established,  1846,  252-255  ; 
advantages  of,  254  ;  Act  of  July, 
1861,  279,  282  ;  deposit  of  public 
moneys,  417-418  ;  moneys  receivable 
by,  in  1891,  443-444  ;  the  system, 
492-494. 

India,  mint  closed  in,  445. 

Indiana,  banking  in,  260  ;  increase  of 
population,  224. 

Indianapolis  Monetary  Conference,  468. 

Indians,  expenditures  for,  1791-1801, 
in  ;  1833-1846  (table),  246  ;  1846- 
1861  (table),  267  ;  1866-1879  (table), 
399  ;  1880-1890  (table),  428  ;  1891- 
1901  (table),  475. 

Inflation  advocated,  1868,  337  ;  argu- 
ments, 339;  in  1874,  372;  in  Re- 
sumption Act  of  1875,  373  ;  in  1877, 
377  ;  and  National  Bank  Currency, 
385  ;  see  Greenback  Party. 

Ingham,  Secretary,  198  ;  correspond- 
ence with  Biddle,  1829,  204  ;  on 
silver  standard,  211. 

Initiation  of  appropriation  bills,  72. 

Initiation  of  revenue  bills,  in  the  Con- 
stitution, 66  ;  history  of  practice, 
478-482. 

Interest  on  debt,  expenditures  for, 
(tables),  in  1791-1801,111  ;  in  1801- 
1811,  124;  in  1812-1815,  141;  in 
1816-1833,  169  ;  in  1833-1846,  246  ; 
in  1846-1861,  267  ;  in  1862-1865, 
329  ;  in  1866-1879,  399  ;  in  18S0- 
1890,  428,  431  ;  in  1891-1901,  475. 

Interest,  rate  of,  on  loans,  during 
Revolution,  46  ;  on  national  debt, 
1790,  95  ;  on  loans,  1812-1815,  132- 
134;  on  loans,  1820-1821,  167  ;  on 
loans,  1841-1843,  235  ;  on  loan  of 
1847,  256 ;  on  loans  of  Civil  War, 
•317,  332  ;  opinion  of  Boutwell,  352  ; 
on  debt  in  Funding  Act  of  1870,  353  ; 
opinion  of  Sherman.  354  ;  on  national 


Index 


521 


debt   in  Currency  Act,  472  ;  on  war 
debt,  payable  in  what  medium,  287, 

344.  345- 

Internal  communication  in  1789,  79. 

Internal  improvements,  early,  212-216  ; 
reckless  investments  by  States,  244  ; 
in  1831-1860  (table),  268;  see  Rivers 
and  Harbors. 

Internal  taxes,  see  Excise  ;  Gallatin  on, 
in  1S08,  129  ;  neglect  of,  in  181 2, 
130  ;  in  1812-1816,  138-141  (table), 
140  ;  increased,  18 14,  139;  repeal  of, 
1818,  141  ;  Act  of  1862,  301  ;  Act  of 
1864,  302  ;  in  1 862-1865,  299  ;  after 
Civil  War,  391-396  ;  in  1 866-1 879 
(tables),  395,  399  ;  reduction,  1880- 
18S3,  418-420;  in  1880-1890  (table), 
420,  426  ;  Act  of  1898,  466  ;  in  1891- 
1901  (table),  475  ;  administration  of, 
492  ;  frauds  in,  393,  395,  492. 

Invoices,  fictitious,  491. 

Iron,  duties  raised,  1818,  173  ;  in  i860, 
273- 

JACKSON,  ANDREW,  position  on 
tariff,  1824,  177  ;  tariff  of  1828, 
182,  185  ;  proclamation  in  1832,  1S6; 
value  of  a  home  market,  192  ;  on 
Bank,  200;  veto  of  bank,  1832,  203  ; 
removal  of  deposits,  203-208;  internal 
improvements,  215;  use  of  surplus, 
218. 

Jefferson,  Thomas,  on  value  of  conti- 
nental bills  of  credit,  40;  coinage, 
70,  102 ;  internal  improvements, 
1805,  214;  use  of  surplus,  217;  in- 
dependent treasury,  235. 

Johnson,  President,  relations  to  treas- 
ury department,  333 ;  on  payment 
of  bonds,  346;  veto  of  tariff  bill, 
481. 

Johnson,  R.  M.,  tariff  of  1828,  180. 

Jones,  W.,  in  charge  of  treasury  de- 
partment, 1 813,  131. 

Juilliard  v.  Greenman,  366. 

l^EITH,    W.,    on    Loan    Bank    in 

Penna.,  colonial,  26. 
Kelley,  W.  D.,  on  foreign  loan,  355; 

reduction  of  internal  revenue  duties, 

419- 


Kentucky  favors  protection  for  hemp, 
1824,  175  ;  in  favor  of  tariff  of  1828, 
181. 

Kinley,  D.,  independent  treasury  sys- 
tem, 493. 

Knights  of  Labor,  410. 

Knox  v.  Lee,  363. 

Knox,  J.  J.,  on  opposition  to  national 
banking  system,  391 ;  silver  legisla- 
tion, 403. 

T  ABOR,  condition  of,  after  the  Civil 
War,  358. 

Labor  party,  381. 

Land  Bank,  Massachusetts,  25;  sup- 
pressed, 29. 

Land  tax,  colonial,  10,  12. 

Lands,  public,  pledged  for  debt  in 
1790,  96;  receipts,  1801-1811,  124; 
sales  of,  1810-1837,  216-217  ;  money 
receivable  for,  228  ;  public  use  of, 
and  speculation,  1837,  225  ;  receipts, 
1834-1846  (table),  246  ;  sales  of. 
1854-1856,  258  ;  receipts,  1846-1861 
(table),    267  ;    unoccupied  in    i860, 

273- 
Lane  Co.  *.  Oregon,  362. 
Latin  Union  and  silver,  406. 
Laughlin,  J.  L.,  on  Act  of  1873,  4°4- 
Law,  relation  of,  to  value  of   money, 

379- 
Legacy  taxes  in  1898,  466. 
Legal  papers,  taxed  in  1794,  109. 
Legal  tender  notes,  of  Civil  War,  284- 
294  ;  opposition  to,  1862,  285  ;  de- 
bate, 286  ;  second  issue,  288  ;  third 
issue,  288,  310  ;  convertible  into 
bonds,  288,  290-292;  depreciation, 
292-294,  360  ;  circulation  discredited 
by  local  banks,  325  ;  considered  as 
war  measure  by  McCulloch,  334  ; 
resumption,  335~338  i  in  FundinS 
Act  of  1866,  340;  contraction  of,  in 
1866,  340;  retirement  stopped,  343  ; 
amount  retired,  344  ;  question  of 
use  in  redeeming  bonds,  344~349 ; 
issued  by  Boutwell,  360;  retired. 
361  ;  issued  by  Secretary  Richard- 
son, 361  ;  Grant's  veto,  361  ;  legisla- 
tion in  1874,  362;  constitutionality 
of,  362-367  ;  issues  in  time  of  peace, 


522 


Index 


366  ;  in  Resumption  Act,  373  ;  value 
in  gold  (table),  376  ;  amount  in  1878, 
377 ;  preferred  to  national  bank 
notes,  389  ;  gold  reserve,  442  ;  pre- 
sented for  redemption,  448-450 ; 
proposition  for  withdrawal,  1895, 
459 ;  see  Resumption. 

Legislation  and  Administration,  ch. 
xxi.,  477-501. 

Lincoln,  President,  272. 

Linderman,  H.  R.,  and  silver  legis- 
lation, 403. 

Loan  banks,  colonial,  24-27. 

Loan  offices,  Revolutionary,  46. 

Loans.  Bank  of  North  America,  55. 

Loans,  First  U.  S.  Bank,  101. 

Loans,  national,  constitutional  pro- 
visions, 67  ;  in  1 789-1801  (table), 
112;  Louisiana,  121;  for  war  pur- 
poses, opinion  of  Gallatin,  129  ;  in 
1811,  130;  in  1S12,  130,  132;  of 
1813,  subscriptions  to,  133  ;  August, 
1813,  134;  March,  1814,  134;  in 
1812-1815,  132;  in  March,  1815, 
134;  in  1812-1816  (table),  138;  in 
1820,  167  ;  in  1821,  167  ;  in  1816- 
1833  (table),  168  ;  1824-1825,  171  ; 
in  1837-1843,  234  ;  Mexican  War, 
255-256 ;  Feb.,  1861,  272 ;  July, 
1861,  277-281  ;  ratio  of,  to  taxes  in 
Civil  War,  299  ;  Feb.  25,  1862,  306- 
309,  344  ;  agency  of  Cooke,  311,  315, 
319;  March  3,  1863,  310-311,  344; 
March  3,  1864,  313,  345 ;  June 
30,  1864,  345  ;  short-term,  315, 
316,  319 ;  March  3,  1865,  345  ;  in 
Civil  War  (tables),  306,  308,  316  ; 
Civil  War  policy,  317-320  ;  Act  of 
1870,  352-354 ;  difficulty  in  selling 
bonds  for  resumption,  375  ;  in  1894- 
1896,  447  ;  in  1898,  467  ;  see  Bonds  ; 
Interest,  Rate  of,  on  Loans  :  Tempo- 
rary Loans  ;  Five-twenties  ;  Ten- 
forties. 

Loans,  revolutionary,  35  ;  difficulty  of 
securing,  42;  domestic,  1776-1789, 
45-47  ;  foreign,  47-49 ;  temporary, 
47;  see  Holland. 

Loans,  Taxation  and  Banking  of  the 
Civil  War,  ch.  xiii.,  298-330. 

Louisiana,  purchase  of,  121. 


Louisiana  stock,  121 ;  redemption  of, 
353- 

]y[cCULLOCH,  H.,  Secretary,  333  ; 
on  compound  interest  notes,  334; 
favors  early  resumption,  334 ;  policy 
of  contraction,  337;  difficulties  in 
resumption,  342;  payment  of  bonds, 
346;  sinking  fund  policy,  356;  sale 
of  gold,  368;  tariff  legislation,  1867, 
396  ;  dangers  of  silver  coinage,  409. 

McCulloch  v.  Maryland,  157,  364. 

McDuffie,  G.,  on  tariff  law  of  182S, 
178;  tariff  proposition  of  1S32,  183; 
initiation  of  tariff  legislation,  479. 

McKinley,  administrative  act  of  1890, 
491. 

McKinley  tariff  of  1890.  438-440. 

McLane,  L.,  tariff  report,  1832,  184; 
tariff  recommendations,  1832,  186; 
Secretary  of  the  Treasury,  199;  op- 
posed to  Jackson's  bank  policy,  205. 

Madison,  J.,  tariff  of  1789,  80,  82; 
duties  of  the  comptroller,  8S;  method 
of  funding  debt,  91  ;  President,  veto 
of  bank,  181 5,  148  ;  necessity  of  pro- 
tection, 1815,  161  ;  tariff  arguments 
for  independence,  192;  value  of  a 
home  market,  192  :  constitutionality 
of  tariff  legislation,  196 ;  veto  of 
internal  improvements,  214. 

Maine,  use  made  of  surplus,  222. 

Mallary  bill,  1827,  177. 

Manning,  Secretary,  on  dangers  of  sil- 
ver coinage,  409  ;  payment  of  silver, 
410;  surplus,  416;  revision  of  tariff, 
1885,  423  ;  gold  reserve,  441;  under- 
valuation, 490;  customs  administra- 
tion, 491  ;  debt  statement,  499. 

Manufactory  notes,  Massachusetts,  25. 

Manufactures,  colonial,  5,  7,  19;  in 
'7^9,  7/-~9  :  after  the  Civil  War,  358. 

Marshall,  Chief-Justice,  decision  in 
McCulloch  v.  Maryland,  157;  taxa- 
tion of  national  loans,  350  ;  influence 
of  decision  in  McCulloch  v.  Mary- 
land, 364-367. 

Maryland,  colonial  taxes,  15  ;  export 
duties,  16 ;  tariff,  17. 

Mason,  J.,  complaint  against  U.  S. 
bank,  200. 


Index 


523 


Massachusetts,  colonial,  taxes,  10-16; 
tariff,  16;  bills  of  credit,  21  ;  banks, 
24-26 ;  amount  of  paper  money  is- 
sued, 1 702-1 750,  29;  industrial  dis- 
content in  1786,  58;  position  on 
tariff  of  1828,  176,  181;  use  made  of 
surplus,  222  ;  banking  after  1837, 
260;    bank-note    circulation,    1869, 

385- 

Matches,  tax  on,  419. 

Maysville  Road,  veto,  215. 

Mediterranean  Fund,  121. 

Merchant,  colonial,  8. 

Merchant  notes,  Massachusetts,  23,  25. 

Meredith,  Secretary,  on  undervaluation, 
1849,  2Sl  i  protection,  258,  259. 

Mexican  claims,  268. 

Mexican  War,  finances  of,  255. 

Michigan,  increase  of  population,  224; 
banking  in,  260. 

Miller,  Justice,  on  constitutionality  of 
legal  tender  notes,  363. 

Mills  tariff  bill,  1888,  424. 

Minimum  principle  in  tariff,  162;  ex- 
tended, 1824,  174;  in  1828,  180; 
abandoned  in  1832,  184  ;  in  tariff  of 
1890,  438. 

Mint,  colonial,  21;  Act  of  1792,  103; 
opposition  in  1792,  104;  bill  of  1873, 
403;  administration,  495. 

Miscellaneous  expenditures,  1 846-1 861, 
explanation  of,  268;  in  1 862-1 865, 
329;  explanation  of,  1866-1879,400; 
items  under,  1S80-1901,  505. 

Miscellaneous  receipts  in,  1866-1879, 
explained,  399;  in  1S62-1865,  329; 
in  1866-1879,  399. 

Mississippi,  repudiation,  244. 

Mitchell,  W.   C,   on   gold    premium, 

295. 
Mobile  real  estate,  1834,  227. 

Molasses,  debate  on  taxation  of,  1789, 

81. 
Money,   colonial,    18-30 ;    substitutes, 
19;    valued  by  law,  20;  of  account, 
20  ;  definition  of,  71. 
Money    market   and    government    de- 
posits, 493. 
Money,  paper,  during  Revolution,  36- 
43  ;  see  Treasury  Notes;  Legal  Ten- 
der Issues  ;  see  Paper  Money. 


Monopoly,  Jackson  on,  1832,  203. 

Monroe,  President,  on  value  of  a  home 
market,  192  ;  argument  for  independ- 
ence, 192  ;  veto  of  internal  improve- 
ments, 214. 

Morrill,  J.  S.,  Committee  on  taxation, 
275;  on  legal  tender  issues,  286  ; 
desire  for  taxation,  300 ;  tariff  legis- 
lation, 1866,  396. 

Morrill,  Secretary,  sinking  fund  policy, 
1876,  357- 

Morrill  tariff  of  1861,  265-267. 

Morris,  Gouverneur,  on  taxation  accord- 
ing to  population,  64. 

Morris,  R.,  endeavor  to  secure  taxes, 
50 ;  report  on  finances,  53 ;  resigna- 
tion, 54;  establishment  of  bank,  55  : 
coinage,  102. 

Morrison  bill  of  18S4,  423. 

Morton,  O.,  on  payment  of  bonds, 
1868,  348. 

"NT  AILS,  taxation  of  1789,  81. 

National  banks,  see  Banks,  Na- 
tional. 

Navigation  Laws,  6,  31. 

Navy,  expenditures,  in  1791-1801  (ta- 
ble), in  j  decreased,  1801,  120; 
increased,  1804,  121  ;  in  1801-1811 
(table),  124;  in  1812-1816  (table), 
141;  in  1816-1833  (table),  169;  in 
1833-1846  (table),  246 ;  in  1846- 
1861  (table),  267;  in  1862-1865, 
(table),  329 ;  in  1866-1879  (table), 
399;  in  1880-1890  (table),  428  ;  in 
1891-1901  (table),  475. 

New  England,  opposed  to  war  loans  of 
1812,  133. 

New  financial  needs,  ch.  v.,  97-117. 

New  Jersey,  colonial  export  duties,  15. 

New  York,  colonial  taxes  in,  13  ;  co- 
lonial tariff,  1 6  ;  depreciation  of  co- 
lonial bills  of  credit,  28  ;  opposition 
to  tariff  in  1 786,  5 1 ;  banking  after 
1839,  260  ;  taxation  of  banks,  350. 

New  York  tariff  convention,  1831,  183. 

"  New  York  Tribune,"  on  resumption, 
335;  protection,  397. 

North  Carolina,  colonial  tariff,  17. 

Northern  States,  resources  in  i860, 
273- 


524 


Index 


Northwest  territory,  aid  for  roads  in, 
213. 

Note  issues,  in  system  of  local  bank- 
ing, 1815-1833,  154;  see  Banks,  Lo- 
cal ;  Banks,  National,  Circulation  of. 

Nullification  doctrine,  182,  185. 

QCCUPATIONS  in  colonies,  5  ;  in 

1789,  76. 
Ohio,  taxation  of   U.   S.  Bank,  159; 

increase  of  population,  224. 
"Ohio  idea,"  348. 
Ohio   Life   Insurance  and  Trust  Co., 

failure  of,  1857,  263. 
Osborne  et  al.  v.  U.  S.  Bank,  159. 
Overstreet    currency    bill     introduced, 

468. 

pANIC  of  1837  and  Restoration  of 
Credit,  ch.  x.,  223-247. 

Panic  of  1837,  229-233,  237  ;  of  1857, 
263;  of  1866,  342;  of  1873,  370-372; 
of  1873  and  protection,  397  ;  influ- 
ence of,  on  refunding,  356  ;  of  1884, 
409;  of  1893.  444;  see  Crisis. 

Paper  money,  colonial,  4,  21-27  ;  rea- 
sons for  issue,  8  ;  depreciation,  28; 
old  and  new  tenor,  Massachusetts, 
29;  redeemed,  29  ;  see  Bills  of  Credit, 
Treasury  Notes ;  Legal  Tender  Is- 
sues; Paper  Money;  Revolutionary. 

Paper  money,  Greenback  party  view  of, 

379- 

Paper  money  in  Constitution,  67. 

Paper  money,  Revolutionary,  amounts 
issued.  36-43;  was  it  necessary  ?  41- 
43 ;  amounts  issued  by  States,  36 ; 
value  of,  in  specie,  40  ;  State  issues, 
1783-1787,  58. 

Parity  of  gold  and  silver,  452. 

Patent  medicines,  tax  on,  420. 

Pennsylvania,  colonial  taxes  in,  15 ; 
tariff,  1 7  ;  Loan  Bank,  26  ;  deprecia- 
tion of  paper  money,  28. 

Pensions,  expenditures  for,  in  1816- 
1833  (table),  169;  in  1833-1846 
(table),  246;  in  1S46-1861  "(table), 
267;  in  1866-1S79  (table).  399;  in 
1880-1890  (table),  428;  Cleveland's 
veto.  437:  in  1891-1901  (table).  475. 

People's  party,  381. 


Permanent  appropriations,  484. 
"  Pet  "  Banks,  209-210. 
Philadelphia,    free    trade    convention, 

1831,  1S3. 
Physiocratic  definition  of  direct  taxes, 

108. 
"  Piece  of  eight,"  20. 
Pine  tree  shillings,  21. 
Polk,  J.  K.,  on  tariff,  1844,  249. 
Poll  tax,  colonial,  10 ;   Massachusetts, 

11  ;  Virginia,  12. 
Pollock  v.  Farmers   Loan   and   Trust 

Company,  457. 
"  Pop  gun  "  bills,  1895,  45S. 
Population   of  colonies,  7  ;  and  direct 

taxes,  63  ;  method  of  apportionment 

according    to,    undesirable,    64 ;     in 

1790,  76  ;  in  i860,  273. 
Populist  party  and  income  tax,  456. 
Ports  of  entry  and  delivery,  489. 
Portuguese  coins,  20. 
Postage  currency,  309. 
Postal  deficiencies,  268. 
Postal  service  in  1 790,  79. 
Powder  duties,  colonial,  15. 
Pownal,  Thomas,  comments  on  Penn. 

Loan  Bank,  27. 
Premiums  on  bonds,   18S0-1890,  430- 

431; 

Premium  on  gold,  see  Gold  Premium. 

Prices,  regulation  of,  during  the  Revo- 
lution, 39 ;  rise  of,  in  Civil  War, 
293-294;  of  silver,  1840-1895,  406; 
and  tariff,  192. 

Problems  of  Reorganization  after  War, 
ch.  vii.,  143-171. 

"  Proclamation  "  money,  21. 

Property  tax,  colonial,  10 ;  in  New 
York,  13. 

Property,  value  of,  i860,  273. 

Prosperity,  national,  1846-1S57,  256 ; 
in  1898,  469. 

Protection  of  home  industries,  colonial, 
14;  Madison  on,  in  1789,  82;  prin- 
ciple of,  in  Tariff  Act  of  1 7S9,  84-85  ; 
President  Madison  on,  1815,  161  ; 
Dallas  on,  1816,  161  ;  Calhoun's 
position,  1816,  164  ;  significance  of 
tariff  of  1 816,  162  ;  relation  to 
prices,  192;  for  young  industries, 
194;   constitutionality   of,    195;   and 


Index 


525 


panic  of  1837,  230  ;  in  1840,  237  ; 
and  pauper  labor  argument,  259  ;  in 
1859,266;  in  1862,  301;  and  Civil 
War,  393;  in  1883,  421  ;  in  tariff  of 
1890,  438;  in  tariff  of  1897,  464;  see 
Tariff. 

QUIT  rents  in  New  York,  colonial, 
14. 

D  AILWAY  construction,  1830,  225  ; 
in  1846-1861,  257  ;  and  panic  of 
1857,  264  ;  after  the  Civil  War,  342, 
370  ;  decline  in,  1893,  446. 

Ramsay,  D.,  on  depreciation  of  conti- 
nental bills  of  credit,  39. 

Randall,  Representative,  position  on 
tariff,  423,  425. 

Randolph,  J.,  in  favor  of  repeal  of 
excise  duties,  120;  repeal  of  salt  tax, 
122;  opposition  to  bank,  181 6,  149. 

Rates  of  duties  on  imports,  1791-1801 
(table),  83  ;  in  1 789-1816  (table), 
163  ;  in  1821-1842  (table),  189  ;  on 
individual  commodities,  in  Act  of 
1842,  239  ;  in  1842-1845,  238  ;  in 
1846-1856  (table),  252  ;  in  1858- 
186 1,  263  ;  in  Tariff  Act  of  1864, 
303;  in  1861-1864,  304;  see  Duties. 

Ratio  between  gold  and  silver,  1791, 
103  ;  in  1792-1834,  210  ;  in  1840- 
1895  (table),  406  ;  see  Bimetallism. 

Receipts,  continental,  in  1775-1783, 35  ; 
in  1 784-1 789,  57  ;  in  1 789-1801 
(table),  no;  in  1801-1811  (table), 
123;  in  1816-1833  (table),  168;  in 
1 833-1 846  (table),  246 ;  in  1846- 
1861  (table),  267;  in  1S62-1865,  330; 
in  1866-1879  (table),  399;  in  1880- 
1890  (table),  426;  in  1891-1901 
(table),  475  ;  kinds  of  money  accept- 
ed for,  1 81 7,  151  ;  see  Independent 
Treasury. 

Reciprocity,  in  tariff  of  1890,  439; 
tariff  of  1894,  456 ;  tariff  of  1897, 
465. 

Refunding,  see  Funding. 

Refunding  Act  of  1870,  352-354. 

Refunding  in  Currency  Act,  1900,  472. 

Register,  duties  of,  87. 

Republican  party,  on  financial  legisla- 


tion, 1795,  IIQ;  protection,  i860, 
266  )  payment  of  bonds,  1868,  348, 
349 ;  resumption,  1875-1879,  372, 
374  ;  Greenback  party  doctrine,  378 ; 
tariff,  1888,  417  ;  deposit  of  govern- 
ment funds,  41S  ;  general  position 
on  tariff,  424-425  ;  silver  coinage, 
1896,  461  ;  tariff  in  1897,  464  ;  reci- 
procity, 465. 

Repudiation,  State,  243-246. 

Requisitions    during    the    Revolution, 

35!  44-45- 

Reserve,  see  Gold  Reserve. 

Resumption  of  specie  payments,  1817, 
151;  in  1838,  232;  advocated  by 
McCulloch,  1865,  334;  theories  of, 
335-338;  opportunity  for,  in  1866, 
340;  opinion  of  Boutwell,  352;  Act 
of  1875,  372-378;  accomplished, 
375 ;  Greenback  explanation  of,  380 ; 
gold  reserve,  440 ;  sale  of  bonds  for, 
448;  amount  of  treasury  notes,  451; 
see  Specie  Payments. 

Revenue  bills,  initiation  of,  66. 

Revenue,  collection  of,  488-492;  see 
Cost  of  Collecting  Excise  Duties. 

Revenue  Commission  in  1865,  392. 

Revolution  and  the  Confederacy,  1775— 
1788,  ch.  ii.,  39-59. 

Rhode  Island,  depreciation  of  colonial 
paper  money,  28 ;  opposition  to 
tariff  during  Revolution,  50. 

Richardson,  Secretary,  issue  of  legal 
tender  notes,  361,  372. 

Riders  on  appropriation  bills,  485. 

Rivers  and  harbors,  expenditures  for, 
1866-1881  (table),  400  ;  in  1880- 
1890,  426-427  ;  see  Internal  Improve- 
ments. 

Roads,  federal  aid  for,  212. 

Ross,  E.  A.,  on  sinking  fund  of  1817, 
171. 

Rum,  high  duty  advocated  in  1789,  81. 

Rush,  R.,  Secretary  of  the  Treasury, 
1825,  165  ;  on  service  of  U.  S. 
Bank,   1828,  157. 

CAFETY   fund  system,   New   York, 

155  ;  recent  propositions,  460. 
Salaries,  colonial,  8. 
Salem,  use  made  of  surplus,  222. 


526 


Index 


Salt,  taxation   of,  1789,  81  ;  repealed, 

1S06,  122. 
Savings  bank  deposits,  tax  on,  420. 
Schurz,  C,  on  panic  of  1837,  229. 
Secretary  of  the  Treasury,  see  Treasury 

Department. 
Sectional  interests   in    1790,    79 ;    see 

South. 
Seigniorage,  coinage  of,  452  ;  profits  of, 

495- 

Seligman,  E.  R.  A.,  types  of  colonial 
taxation,  10. 

Senate,  in  revenue  legislation,  478;  and 
appropriation  bills,  486. 

Seven-thirty  notes,  of  1861,  277,  307  ; 
of  1864,  315  ;  of  1865,  332. 

Seward,  Governor,  distribution  of  sur- 
plus, 221. 

Seymour,  H.,  on  payment  of  bonds, 
1868,  348. 

Shaw,  Secretary,  on  government  de- 
posits, 493. 

Shays's  insurrection,  58. 

Shepard,  E.  M.,  on  speculation  in 
1S37,  226. 

Sherman,  J.,  on  independent  treasury 
system  in  1S61,  2S2  ;  in  favor  of 
legal  tender  issues,  286  ;  converti- 
bility of  legal  tender  notes,  291  ;  on 
confused  character  of  the  debt,  333  ; 
methods  of  resumption  in  1866,  337  ; 
supply  of  currency,  338  ;  payment  of 
bonds,  1868,  348  ;  rate  of  interest  on 
bonds,  354  ;  Resumption  Act  of 
1875,  373  ;  defect  of  Resumption 
Act,  374  ;  appointed  secretary.  1877, 
374  ;  favors  gold  reserve,  375,  440, 
441  ;  tariff  legislation  after  Civil 
War,  396  ;  circulation  of  silver  dol- 
lars, 408  ;  tariff  of  1883,  422. 

Sherman  Silver  Act  of  1890,  436  ;  re- 
peal of,  444. 

Shipbuilding,  colonial,  6  ;  taxation  in 
17S9,  81. 

Shipping,  taxes  on,  colonial,  15  ; 
foreign  discrimination  against,  in 
1789,   83. 

Short-term  loans,  see  Loans. 

Signers  of  continental  bills,  37. 

Silver,  price  of,  1840-1895  (table),  406  ; 
fall  in  value,  1893,  445. 


Silver  Act  of  1890,  436-438  ;  repeal, 
444. 

Silver  and  Banking,  1873-1890,  ch. 
xvii.,   402-413. 

Silver  and  the  Tariff,  ch.  xix.,  434- 
462. 

Silver  Bank,  26. 

Silver  certificates,  issue  of,  407-408; 
increase  in,  1900,  471;  in  debt  state- 
ment, 500. 

Silver  coinage,  Spanish  dollar,  20; 
in  1853,  211;  demonetization  of, 
403-407;  dollars  coined,  1878-1890, 
407  ;  parity  with  gold,  452  ;  struggle 
for,  460-462  ;  and  payment  of  bonds, 
question  of,  354,  451  ;  position  of 
Senate  in  1898,  468 ;  final  redemp- 
tion, 470  ;  see  Ratio  ;  Bimetallism  ; 
Free  Coinage. 

Sinking  Fund  established  in  1789, 
113;  Act  of  1795,  114;  in  1817,  165, 
171  ;  after  Civil  War,  356-358;  pur- 
chase of  bonds  for,  429. 

Slavery,  relation  of,  to  the  tariff  in 
1828,  181. 

Slaves,  colonial  tax  on,  10;  import, 
taxes  on,  16;  and  direct  taxes  in  the 
Constitution,  63;  taxes  on,  65. 

Snuff,  manufacture  of,  taxes,  1794, 
108. 

"  Soft  "  currency,  378. 

South  Carolina,  colonial  tariff,  16; 
colonial  export  duties,  16 ;  opposed 
to  tax  on  exports,  64  ;  on  protective 
duties,  1825,  182  ;  tariff  demands, 
1832,  183;  ordinance  of  secession, 
1861,  274. 

Southern  States,  on  tariff  duties  in 
1789,  Si;  assumption  of  debt,  92; 
tariff  of  1824,  174;  opposition  to 
tariff  of  182S,  181  ;  distribution  of 
surplus,  220:  Confederacy  in,  1861, 
274;  commerce  in  i860,  274;  need 
of  money  supply  after  the  war,  339 ; 
bank  note  circulation,  1869,  3S5. 

Spain,  Revolutionary  loan  from,  47; 
war  with,  465. 

Spanish  coins,  20;  dollar,  disappears 
from  circulation,  211. 

Spanish  war,  finances  during,  465-468. 

Spaulding,  E.  G.,  Committee  on  Loans, 


Index 


527 


275;  on  Act  of  Feb.  25,  1862,  284; 
convertibility  of  legal  tender  notes, 
291. 

Specie  circular,  227-229. 

Specie,  drain  of,  in  colonial  times,  8, 
19;  export  during  War  of  1812,  145  ; 
in  Independent  Treasury  Act,  236; 
export  after  Civil  War,  371. 

Specie  payments,  suspended  in  1S14, 
145;  resumed  in  1817,  151;  suspen- 
sion in  1837,  229-231 ;  resumed  in 
1838,  232 ;  suspension  in  1S61, 
281 ;  resumption,  advocated  by 
McCulloch,  334;  theories  of  resump- 
tion, 335-33S :  Resumption  Act  of 
1875,  372;  resumed  in  1878,  404; 
see  Resumption. 

Specie  requisitions,  during  Revolution, 

45- 

Specific  appropriations.  488. 

Specific  duties,  colonial.  1 7 ;  in  tariff 
of  1789,81;  abandoned,  1846,  251; 
in  Morrill  tariff,  264. 

Speculation,  in  certificates  of  indebted- 
ness, 1790,  91;  in  1S37,  226;  and 
banking,  1S1 5-1860,  262 ;  in  gold,  369. 

Spirits,  duties  on,  see  Excise  ;  Internal 
Revenue. 

Springer  v.  U.  S.,  457. 

Stamp  duties,  English  in  colonies,  31- 
32;  in  1814,  139;  in  1898,  466. 

State  bills  of  credit,  17S3-1787,  58; 
issue  forbidden,  69. 

State  debts,  assumed  in  1790,  92,  93. 

State  repudiation,  243-246. 

State  tariffs  forbidden,  65. 

Stevens,  J.  A.,  on  indebtedness  in  1795, 
116. 

Stevens,  T.,  chairman  of  committee  on 
ways  and  means,  275  ;  on  converti- 
bility of  legal  tender  notes,  288 ;  pay- 
ment of  bonds,  348. 

Storehouses  for  public  property,  co- 
lonial, 19. 

Story,  Justice,  definition  of  taxes,  108; 
note  issues  by  State  banks,  261. 

Strong,  Justice,  on  meaning  of  coinage, 
70. 

Sub-treasury,  see  Independent  Treasury. 

Suffolk  system  of  redemption,  155. 

Sugar  bounty,  439,  440. 


1  Sugar,  duties  on  manufacture  of,  1794, 
108;  duties  in  1S14.  139;  in  tariff  of 
1S94,  456  ;  in  tariff  of  1897,  464. 

Sumner,  C,  on   resumption,  335  ;   re- 
duction of  currency,  1868,  344. 
\    Sumner,  W.  G.,  on  Revolutionary  re- 
quisitions, 45;    constitutionality    of 
tariff  legislation,  195. 

Sumptuary  taxes,  colonial,  14. 

Supreme  Court,  changes  in,  1871,  364. 

Surplus,  in  1791-1801  (table),  112;  in 
1801-1811  (table),  126;  disposition 
of,  in  1834,  217-222  ;  deposited  with 
States,  1836,  220;  use  made  of,  222  ; 
inability  to  deposit  fourth  instalment, 
229;  in  1834-1846  (table),  247  ;  and 
independent  treasury  system,  254 ;  in 
1846-1861  (table),  269;  in  1866-1879 
(table),  401 ;  in  1880-1890  (table), 
429;  in  1890-1901  (table),  476;  diffi- 
culty in  management  of,  494. 

Surplus  Revenue,  1880- 1890,  ch.  xviii., 

412-433- 
Suspension    of    specie    payments,   see 

Specie  Payments. 
Syndicate,  bond,  1895,  453. 

'"TANEY,  Secretary,  supports  Jack- 
son, 1833,  205;  on  removal  of 
deposits,  207;  Chief -Justice,  note 
issues  by  State  banks,  261. 

Tariff,  in  colonies,  14-17;  attempts  to 
secure  a  national,  in  1 783,  50 ;  dur- 
ing Revolution,  50  ;  State,  forbidden 
in  Constitution,  65;  Act  of  1789, 
80;  Act  of  1792,  S2;  duty  on  salt 
removed,  122;  of  1812-1816,  161- 
165,  173  ;  of  1818,  173;  bill  of  1820. 
defeated,  174;  Act  of  1824,  174  ;  of 
1828,  176-181  ;  relation  of  slavery, 
181  ;  of  1830,  182  ;  of  1832,  184;  of 
1833,185-189;  of  1842,  237-239;  of 
1846,  249-252;  of  1S46,  and  panic 
of  1S57,  263 ;  of  1857,  262-265 ;  in 

1861,  277,    300;    Act    of    July    14, 

1862,  301;  of  1864,  303;  of  1870, 
397 ;  after  Civil  War,  396-398 ;  of 
1872,  398;  revision,  1883,  420-423; 
of  1890,  438-440  ;  of  1894.  454,  455: 
of  1897,  463-465  ;  early  arguments, 
191-196;  constitutionality,   195;  in- 


52S 


Index 


itiation  of  bills,  478-482  ;  see  Rates 
of  Duties  on  Imports;  Reciprocity; 
Protection. 

Tariff,  Independent  Treasury,  and 
State  Banks,  ch.  xi.,  248-270. 

Tariff  legislation,  1813-1833,  ch.  viii., 
172-196. 

Tariff,  War,  and  Currency  Act,  ch. 
xx.,  463-476. 

Taussig,  F.  W.,  tariff  of  1832,  184; 
tariff  of  1883,  422. 

Taylor,  J.,  denunciation  of  tariff,  194. 

Taxation,  colonial,  9-17. 

Taxation,  constitutional  provisions,  62- 
67;  uniform,  62;  on  slaves,  65;  pur- 
poses of,  ill-defined,  65  ;  see  Direct 
Tax. 

Taxation  during  the  Revolution,  44- 
52 ;  to  redeem  continental  bills  of 
credit,  39;  State,  44;  difficulties, 
44 ;  method  of  levy,  49. 

Taxation,  national,  1 789-1900,  see  Cus- 
toms; Direct  Taxes ;  Excises;  Income 
Tax;  Internal  Revenue;  Tariff. 

Taxation  of,  banks,  national,  327,  388  ; 
of  banks,  State;  328,  384,  388;  of 
bonds,  350-352;  of  carriages,  1794, 
106-107;  of  carriages,  1814,  139; 
direct,  1814,  139;  of  income  (table), 
305  ;  savings  banks  deposits,  420 ; 
of  U.  S.  Bank,  157;  see  Duties; 
Taxation,  National. 

Tea,  taxed  by  England,  32;  tax  re- 
moved, 1872,  398. 

Teller,  Senator,  and  free  coinage,  461. 

Temporary  loans,  Bank  of  North 
America,  47;  in  1789-1801,  113; 
utility  during  Civil  War,  320 ;  in 
1865,  332;  after  Civil  War,  340. 

Ten-forties  of  1864,  313. 

Tennessee,  tariff  of  1828,  i8x. 

Tobacco,  colonial  tax  on  exports,  12, 
16  ;  duties  reduced  in  1883  and  1890, 
420;  doubled,  in  1S98,  466;  see  Ex- 
cise; Internal  Revenue. 

Tonnage  duties,  colonial,  12,  15;  in 
1789,  83. 

Trade,  balance  of,  and  resumption,  335, 
337.  377 ;  foreign,  79. 

Travel  in  1790,  79. 

Treasurer,  duties,  87. 


Treasurers,  colonial,  iS. 
Treasury  department,  administration 
during  Revolution,  52  ;  organized  in 
1789,  85-87;  internal  organization, 
87-89;  reports  of,  115,  116;  Presi- 
dent Jackson's  relation  to,  200  ;  un- 
available funds,  221;  changes  intro- 
duced by  Guthrie,  269  ;  and  sales  of 
gold,  368-370  ;  and  revenue  legis- 
lation, 488 ;  accounting,  49S-501  ; 
miscellaneous  bureaus,  501  ;  list  of 
secretaries,  509. 

Treasury  notes,  characteristics  of,  in 
1812-1815,  137  ;  amounts  issued, 
136-138  ;  in  1837-1843,  232,  234  ; 
receivable  for  public  dues,  1846,  253; 
in  Mexican  War,  255  ;  in  i860,  272  ; 
Chase  on,  1861,  281  ;  short-term 
during  Civil  War,  312,  313  ;  issued 
under  Act  of  1890,  442;  redemption 
of,  in  Currency  Act,  469-471  ;  retire- 
ment of,  471  ;  see  Legal  Tender 
Issues;  Temporary  Loans ;  Greenback 
party;  Resumption;  Seven-thirty 
notes;  Compound  interest  notes, 
Fractional  currency. 

Treasury,  Secretary,  see  Treasury 
Department. 

Treasury  statements,  507-509. 

Tripoli,  war  with,  121. 

Two  and  three  per  cent  stock,  213. 

Tyler,  President,  238  ;  tariff  veto,  238, 
481  ;  bank  veto,  240-242  ;  conflict 
with  his  party,  238-243 ;  Tyler, 
L.  G.,  on  President  Tyler's  bank 
veto,  241-243. 

UNAVAILABLE  funds  in  treasury, 
221. 

Undervaluation  of  imports,  176,  189; 
legislation  against,  182  ;  increase  of, 
490  ;  see  Valuation  of  Imports. 

Unemployed  in  1893,  446. 

Uniform,  meaning  of,  in  taxation,  63. 

Unit  of  value,  1791,  104. 

United  States  Bank,  First,  advantages 
enumerated  by  Hamilton,  99  ;  doubt 
of  its  constitutionality,  100;  assist- 
ance to  the  government,  101  ; 
branches  of,  100  ;  political  opposition 
to,  127  ;  end  of,  126-128. 


Index 


529 


United  States  Bank,  Second,  estab- 
lished, 145-150  ;  operations  of,  in 
1816-1819,  150-153 ;  conflict  with 
local  banks,  155;  operations  in 
1823-1829,  156-157;  attempt  to  tax, 
157;  circulation  (table),  156  ;  oppo- 
sition to,  1829,  200;  President  Jack- 
son's criticism  in  1829,  200  ;  favora- 
ble report  on,  in  1830,  200;  petition 
for  re-charter,  1832,  202;  Jackson's 
cabinet  paper,  1833,  205;  Jackson 
questions  soundness,  1832,  204; 
favorable  report,  March,  1833,  205  ; 
Jackson's  opinion  of  Biddle,  1832, 
205;  loans,  1831-1832,  208;  foreign 
holders  of  stock,  208;  failure  to 
secure  re-charter,  208. 

United  States  v.  Hylton,  decision  in, 
107. 

yALUATION  of  imports,  home, 
187,  190;  Act  of  1S51,  252;  in 
present  administration,  489 ;  see  Un- 
dervaluation. 

Value,  unit  of.  104. 

Van  Buren,  on  tariff  of  1828,  178-181 ; 
internal  improvements,  1824,  214 ; 
President,  refusal  to  rescind  specie 
circular,  231  ;  special  message,  232. 

Verplanck,  tariff  bill,  1832,  186. 

Veazie  Bank  v.  Fenno,  388. 

Virginia,  colonial  taxes,  12  ;  export 
duties,  15  ;  duties  on  shipping,  15  ; 
issues  of  paper  money,  29  ;  claim  for 
fourth  instalment,  221. 

Votes  on  tariff  bills  (tables),  of  1816, 
163  ;  tariff  of  1824,  175  ;  tariff  of 
1828,  1S0  ;  tariff  of  1832,  185  ;  tariff 
act  of  1833,  187  ;  tariff  of  1846,  250  ; 
tariff  of  1857,  263. 

^/"AGES  during  Civil  War,  294. 

Walker,  A.,  on  lowering  rate  of 
interest  on  bonds,  318. 

Walker,  F.  A.,  on  Act  of  1873,  404. 

Walker,  R.  J.,  Secretary,  249  ;  tariff 
measure,  250,  481  ;  on  customs  du- 
ties, 259;  foreign  sale  of  bonds,  354. 

War,  expenditures,  in  1791-1801,  111  ; 
increased,  1S09,  123;  in  1801-1811 
(table),  124;  in    1812-1815  (table), 

34 


141  ;  in  1833-1846  (table),  246  ;  in 
1846-1861  (table),  267  ;  in  1862- 
1865  (table),  329  ;  in  1866-1879 
(table),  399  ;  misleading  tables,  400  ; 
in  1880-1890,  427 ;  in  1880-1890 
(table),  42S  ;  in  1891-1901  (table), 
475  ;  Spanish  War,  expenditures  for, 
467. 

War  loans,  see  Loans. 

Warehouse  system  established,  1846, 
239,  252. 

Washington,  President,  confidence  in 
Hamilton,  116  ;  tariff  arguments  for 
independence,  192. 

Washington  Turnpike  Co.,  Jackson's 
veto,  215. 

Ways  and  Means  Committee  in  tariff 
legislation,  481,  487. 

Webster,  D.,  on  coinage,  71  ;  plan  for 
a  bank,  1814,  147  ;  position  on  tariff, 
1820,  175  ;  in  1824,  175  ;  position  on 
tariff  of  1828,  176,  181  ;  tariff  of 
1833,  187  ;  on  panic  of  1837,  231  ; 
on  Tyler's  bank  plan,  243. 

Webster,  P.,  depreciation  of  continental 
bills  of  credit,  41. 

Wells,  D.  A.,  on  internal  revenue 
taxes,  301  ;  taxation  during  Civil 
War,  304  ;  resumption,  336  ;  balance 
of  trade  after  Civil  War,  371  ;  Rev- 
enue Commission,  392;  tariff  meas- 
ure of  1867,  396. 

West  Indies,  colonial  trade  with,  6  ; 
exports  to,  1790,  79. 

West,  position  of,  on  the  tariff,  1824, 
174  ;  money  supply  deficient  after 
Civil  War,  339  ;  bank-note  circula- 
tion in  1869,  385  ;  money  question 
after  1880,  410;  economic  condition 
after  1891,  460. 

Weston  v.  Charlestown,  350. 

Wheat,  price,  after  Civil  War,  370  ; 
in  1894,  447. 

Whig,  position  on  tariff  of  1844,  249. 

Whiskey  insurrection,  106. 

Whiskey  Ring,  492. 

Whiskey  taxes  in  1791,  105  ;  opposi- 
tion to,  105-106  ;  in  1802,  120  ;  in 
1812,  138  ;  see  Internal  Revenue. 

White,  H.,  on  Act  of  August  5,  1861, 
282;  Act  of  1873,  404. 


53° 


Index 


Windom,  Secretary,  on  deposits  of 
government  funds,  417  ;  redemption 
of  bonds,  431  ;  silver  recommenda- 
tion, 1890,  436. 

Wines,  tax  on,  108  ;  see  Excise;  Inter- 
nal Revenue. 

Wolcott,  O.,  Secretary,  117. 

Woodbury,  L.,  Secretary,  199  ;  com- 
plaint against  bank,  1829,  200  ;  use 
of  surplus,  220  ;  on  specie  circular, 
1836,  228. 


Wool,  duties   on,  175  ;  in    1824-1828, 

179  ;  abolished,  1894,  456  ;  in  tariff 

of  1897,  464. 
Wool  schedule,  history  of,  1897,  483. 
Woollen  duties,    1816,   162  ;   in    1824, 

176  ;  in  1827,  177  ;  in  1828,  179;  in 

1883. 
Wright,  S.,  tariff  of  1828,  180. 

VOUNG  industries  argument,  194. 


A     °°0  176  510 


